Most people who want to go into business get stopped up by one thing or another. One of the hardest things to figure out for small business owners is taxes. If you’re struggling with this, here’s what you should know.
A business usually has to pay taxes on its income. Normally, this is done quarterly throughout the fiscal year. Estimated tax payments are due for businesses anticipating having a tax bill of at least $500 when they file a return. Form 1040-ES is what you need to use to determine how much in estimated taxes you should pay. Payments are made to the Federal Government, and most of the time to the state as well.
If you don’t make estimated payments, you’ll pay penalties to the IRS. So, it’s important to pay quarterly taxes on time or request an extension in advance of the due dates. To calculate your tax bill, you need to consider a few things:
- First, the IRS expects you to pay 90% of the overall tax you will owe or;
- 100% of last year’s taxes. They expect 110% if your total income is over $150,000.
- You may pay annualized taxes based on the previous quarters, minus expenses, and then pay at your personal income tax or corporate rate.
- Your accountant can help you make the right decision when it comes to paying taxes.
The Ordinary and Necessary Expenses
Usually, all “ordinary and necessary” expenses can be deducted from your business income when you file your business tax return. Sometimes, deductions include business travel, office and computer equipment, attorney and accounting fees, delivery costs, and utilities, and rent. These are items which are necessary to conduct your business operations. Mileage accrued for business travel can also be deducted according to the IRS’s current deduction rate.
You can, alternatively, deduct expenses associated with maintaining the vehicle. But, you cannot deduct both the expenses for the vehicle and mileage. Either way, keep careful records concerning your expenses, and have backup material on hand you can use to prove all your expenses. If you’ve incurred expenses that are business and personal in nature, like a trip that was both for business and personal reasons, you should deduct a portion of those expenses that relate to the business side or portion of the trip.
For example, if you went on a cruise, but you only spend 20% of your time conducting business, you should only deduct 20% of the expenses associated with the trip. Use discretion when determining what portion of total expenses were business-related. Document all those expenses and be able to prove them.
With the rise in home-based businesses, it has created a gray area regarding deductions.
If you’re unsure about how to sort out personal and business deductions, view this from Alexander Law Firm.
Pass Through Taxes
If you are a sole proprietor, then your taxes are somewhat straightforward. You file on a 1040 and report business income or loss. Partnerships, LLCs, and S Corporations are examples of business with pass through taxes. Each of these business structures are examples in which the taxes are passed through to the owners. The owners then report the income or loss on their own personal income tax returns.
Unlike a C Corporation, where there might be a double taxation issue, LLCs and S Corps are pass-through entities. According to the IRS, a pass-through entity classified as a partnership must file its taxes by the 30th day of the 4th month following the end of the company’s taxable year.
Tax Deferred Retirement Plan
If your business is set up so that you pay tax on your profits from the business part of your personal income tax, you should consider a tax-deferred retirement plan, or a structure which allows you to remove money from the business in a tax-efficient manner so you can set up a savings plan outside the company.
While a plan is always advantageous way to save money, there’s a lot to know about them. SEPs, Keoghs, SIMPLE, and other similar plans will defer some of your personal income from the business and lower your current tax bill. You will have to pay those taxes later though. And, you’ll have to pay tax on your interest earnings on the contribution.
Your financial advisor should be able to help you make this decision.
Sales taxes are something you probably need to sort out right away. While congress has toyed with the idea of a national sales tax, it’s not happening any time soon. You only need to worry about your state’s sales tax unless you sell outside of your state and have “nexus” in another state.
Payroll taxes are taxes you pay on employees. They’re due either weekly, semi-weekly, or monthly depending on the size of your payroll. The IRS dictates the schedule.
Social Security And Medicare Tax (FICA)
These taxes are due on your withheld payroll taxes from employee paychecks. They are used to fund future retirement savings for your employees. Today, more than 90% of retired Americans receive Social Security.
You must pay 7.65% in addition to the amount you withhold from the employee’s paycheck. This is your share toward the employee’s retirement.
Aimee Fisher is an bookkeeper who works with micro and small-medium businesses. She is often horrified at how little start-ups know about keeping records ready for filing their tax return, and is taking it upon herself to educate the masses!!