How to Avoid Business Tax Time Surprises
15 Jan, 2018 / Comments: Comments Off on How to Avoid Business Tax Time Surprises / By William Mahnic
There’s something so freeing about owning your own business, the only person you have to answer to is you. Until tax time that is. When you work for someone else, your employer is the one who withholds your federal taxes from your paycheck. When you run your own business and work for yourself that responsibility falls to you. Whether you are new to owning your own business or you have been your own boss for a while now, understanding your tax responsibilities is essential. Here are 5 tips on how to avoid any surprises come tax time.
Figure Out Self-Employment Tax Obligations
Since you work for yourself, you have to pay a self-employment tax. This responsibility isn’t just for those who work by themselves or who have sole proprietorship of a business. Anyone who is part of a business partnership or an LLC has to pay this tax. Any business that earns more than $400 in the course of the year is required to pay the self-employment tax. The exact amount that you have to pay is based on a specific percentage. Part of what you pay goes to Medicare and another part goes to Social Security. Keep in mind that even though you are paying a self-employment tax, you are still responsible for filing your individual income tax.
Make Quarterly Payments
As a business owner, you don’t have federal taxes withheld from your regular paychecks. To make up for this, the IRS expects quarterly estimated payments toward what you believe you will owe come April 15. Paying quarterly has some major benefits. For one, it helps you to avoid the shock of a huge tax bill at tax time. The IRS has a schedule of when they expect quarterly payments by. Making these payments in accordance to their schedule will also help you to avoid serious penalties regardless of whether or not you are eligible for a refund. Estimating what you think you will owe at the end of the year and setting the money aside as it comes in will help to ensure that you have what you need.
Separate Your Accounts
As a business owner, it is crucial that you have two separate accounts. Keep one account for your personal finances and open a second for your business. Your business account should only be used for business related expenses. Combining both personal and business expenses into one account could leave you susceptible to confusion at tax time. It could also potentially put your personal financial health at risk. Save yourself the trouble and keep the two completely separate from one another.
Designate Employees Correctly
Some business owners have their own employees while others hire contractors, or freelancers. Still others have a mix of both. It is important for you that you designate your employees correctly. You are responsible for withholding the federal taxes of your in-house employees. Contractors are responsible for taking care of this themselves. If you accidentally designate a contractor incorrectly and the IRS sees them as an in-house employee, you could get stuck with some serious penalties.
Know the Deductions You Are Eligible For
There is a significant amount of tax deductions out there that are available for small businesses, including those just getting started. Unfortunately, many business owners aren’t aware of all of the deductions that they are eligible for and therefore miss out. Do your research and see what’s out there, and make sure that you fit the criteria. If you are unsure, it may be worth your time to check in with a tax professional.
Some surprises are good but surprises at tax time, however rarely are. Preparing yourself now will help you to avoid any unwanted surprises, allowing you to avoid unnecessary stress, keep your finances in order and keep your business running smoothly.