Taxes are confusing. There’s no debating that. Former U.S. Secretary of Defense Donald Rumsfeld wrote a letter to the IRS stating he has no idea if the amount he paid for 2013 is accurate at all.
Small business taxes are even more perplexing than individual returns because there is so much more involved. Small business owners who are filing for the first time are often unaware of the intricacies of paying taxes as an organization.
Help with Small Business Taxes
Don’t worry. This article will offer all the small business tax help you’ll need to get through this tax season.
Since we already mentioned deductions, let’s start with those.
The biggest mistake new business owners make is thinking they can’t make deductions until their business is profitable.
This couldn’t be farther from the truth.
Every business is going to have startup costs. These costs can be substantial depending on the business.
Anything bought for the use of your business is a deduction. And don’t forget to take depreciation into account when filing this year. Taxes for business owners require more work to find ways to save money.
Machinery, computers, and other tools that go down in value can have a significant impact on your tax bill.
Use an S-Corporation to Avoid Double Taxation
Forming an S Corporation (S-Corp) is the best way to avoid paying your small business taxes twice. Because corporations are their own entities in the eyes of the IRS, they must pay taxes as an individual would.
If your business is set up as a standard corporation, when you go to pay yourself you have to pay taxes on this money again. An s-corp allows you to skip this double taxation by passing on the gains and losses of your business to your personal income statement.
So for example, your home cleaning business made $80,000 this year and you’re the only employee. Setting yourself up as an S-corp tells the IRS to ignore the income of your business and to instead tax the income that has been passed onto you as the sole shareholder.
Hire a Professional
88% of small business owners hire outside help when filing their taxes. It’s no wonder since the small business administration (SBA) found that the average small business spends 32 hours a year keeping records for their taxes.
Filing taxes for a small business takes almost an entire week of full-time work. It will take even longer if you are inexperienced with how business taxes work and are trying to file by yourself.
Although it’s another expense there are a few reasons hiring a professional tax preparer can benefit your business:
- Help cut down your tax bill
- Help in case of an audit
- Organize your records
And not all tax preparers cost the same. Lawyers, CPA’s, and enrolled agents (EA) can all help you with tax preparation.
A tax attorney is usually the most expensive option, but you only need one if you are headed to tax court. Hiring a tax attorney if you’re not going to court is like taking a wad of hundreds to the penny slot machines.
For most small businesses, an EA is all you need. EA’s also charge less than a CPA or attorney would for the same job.
Why are they cheaper? An EA specializes in taxes. They do not do all the accounting and analyzing a CPA does.
But because they specialize in taxes, they may do a better job than either a CPA or attorney for less money. For more information on getting professional help with your taxes, read more here.
Another pitfall of small business owner taxes: estimated taxes. When you’re an employee, your employer withholds part of every paycheck and pays it directly to the government.
This works great for employees because they can pay their taxes as they go, and often get a refund at the end of the year.
But as a business owner, you’re in charge of paying your own taxes. And the government doesn’t want you spending all your money before they get their cut. The IRS is just like your parents trying to get you to budget out your allowance for the week.
So they’ll expect payments of your estimated taxes four times throughout the year. Missing any of these four payments results in hefty fees.
Estimated tax due dates are April 15th, June 15th, September 15th, and January 15th. If a holiday interrupts any of these dates, they are pushed back to the next workday.
But how are you supposed to know by April, how much you’ll make for the whole year? Underpaying is much worse than overpaying because the IRS charges an underpaying penalty.
Not only that, but you still have to pay the rest of your tax bill. So how can you be sure to avoid dreaded underpayment fees?
Estimated Tax Safe Harbor
As long as your estimated taxes cover at least 90% of your small business tax bill for the year, you won’t face any penalties. This becomes even easier once you get past your freshman year in business.
You can pay the exact same amount you paid last year, and even if it is way below this year’s bill, you won’t face penalties. This is called the estimated tax safe harbor.
The good thing is you can adjust your payments throughout the year as you get a better idea of how much you’ll be making.
While it might not be in your business’ best interest to hand over a bunch of money to the IRS to withhold for months, overpaid taxes will always get back to you in the form of a refund.
Taxes are Complicated
As former Secretary of Defense, Donald Rumsfeld felt let down by the country he worked so many years for. His letter to the IRS highlighted his dismay with how complex paying taxes in America is.
So if someone who once held a high ranking government position has a hard time understanding the system, it’s no wonder doing taxes for small businesses is even harder.
Don’t beat yourself up if you are having a difficult time figuring out your taxes, everyone does. Hire outside help and try your best.
And remember that underpaying is your biggest enemy. Overpaying might keep some much-needed funds tied up, but it’s better than paying more in penalties.
Now that you know a few ways to save on small business taxes, learn other ways to save your business money by reading this article now.