Tag Archives: business taxes

Small Business Tax Tips – Part 2

Yesterday I posted the first six of 12 tax tips  for small businesses. Here are 7 – 12. Please note every effort has been made to include accurate information, but further research and the advice of a certified tax professional is highly recommended before following any of the tax advice contained here.

7. Help

If you are unsure about anything related to your tax obligations under the law, you should seek professional help from a certified public accountant. Meeting with your CPA quarterly to go over your specific situation will allow him or her to best advise you on what to do to keep your tax bill, and the stress over it, as low as possible.

7a. Update Your Accounting
Spend time each year reviewing your accounting practices to ensure that your books are up-to-date and accurate. Speak with your accountant about your procedures and ask if your current computer accounting system is the right system for your business.

 8. Traps

A small business owner may do some things that are more likely to get IRS attention than others. For example, claiming deductions that exceed your income for more than one year is a definite red flag. The home-office deduction, which is allowable only under specific circumstances, may be another red flag. That’s not to say you shouldn’t claim every deduction you’re entitled to claim, only that you should be especially careful when you do so.

Avoid Common Audit Traps:

  • Classifying Employees as Independent Contractors – Independent contractors and employees are not the same and it is important to understand the difference. In the eyes of the IRS, misclassification can be seen as an attempt to avoid payroll taxes; non-compliance can bring penalties and back taxes.
  • Home Office Deduction – This deduction is very specific and not all home-based businesses qualify. Know how to determine if you are eligible to claim this deduction and what specific expenses may be deducted.
  • Large Sum Miscellaneous Deductions – If you claim a large amount of itemized deductions or miscellaneous expenses, relative to your income, the IRS could get suspicious. Be specific and label every deduction.

9. Meet Deadlines 

April 15 isn’t the only important tax date for business owners. The following dates are important to keep in mind:

  • Annual returns. Most annual returns are due April 15 for unincorporated companies and S corporations. C corporations must file annual corporate returns within two-and-a-half months after the close of their fiscal year.
  • Estimated taxes. Estimated taxes are due four times a year: April 15, June 15, September 15, and January 15.
  • Sales taxes. Sales taxes are due quarterly or monthly, depending on the rules in your state.
  • Employee taxes. Depending on the size of your payroll, employee taxes are due weekly, monthly or quarterly.

10. Keep Business and Personal Expenses Separate

The IRS scrutinizes personal expenses that may have been claimed as a business expense, such as the use of a business vehicle, for personal use. Maintain separate bank and credit card accounts for your business and personal use. Be diligent about keeping good records.

11. Contributions

Many small business owners donate goods or services to charitable organizations throughout the year. Be sure to get a valuation for any non-cash items your business donates to charity so you’ll have the records you need to support the deduction for your contributions.

12. Always Keep Your Tax Documentation for Seven Years 

Although no one is looking for an audit, it is better to have your documentation ready if it happens. Some things like copies of business tax returns, licenses, incorporation papers, and capital equipment expenses should be preserved indefinitely. Keep any tax-related documents (e.g., expense receipts, client 1099 forms, and vehicle mileage logs) for a minimum of seven years.

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For additional information on these tax tips and current year tax deductions visit the SBA Small Business Tax Guide or contact the IRS. Next time we will discuss deductions for your small business in more detail.

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Small Business Tax Tips

According to the professionals at the website AllBusiness.com: “Taxes are one of the most important issues facing small and growing businesses. And like a company’s profits, its annual tax bill will in part reflect the owner’s skills and knowledge. Business owners need to be sure that they are meeting all of their responsibilities to the tax man — and also seizing every opportunity to reduce their taxes.”

Here are the first six of 12 tips I gathered from the internet in an attempt to ease the burden of tax preparation and help in preparation for the next deadline. Please note every effort has been made to include accurate information, but further research and the advice of a certified tax professional is highly recommended before following any of the tax advice contained here.

1. Keep Good Records
Proper record-keeping year-round is the first step to ensure taxes are filed accurately. Save essential paperwork that could be needed to back-up deduction claims, should there be an audit. Keep it in mind that tax credits and deductions change each year.

2. Understand Available Deductions
One of the reasons small business owners pay more taxes than necessary is that they don’t take advantage of all of the deductions they’re legally allowed. Often that happens because they can’t prove they are qualified. The most common deductions for small business owners include entertainment, travel, meals, capital assets, home office and health insurance. Travel miles, meals and entertainment deductions require that you maintain a diary with daily entries that tie into receipts and other records.

3. Employee Taxes
If a business has employees, a variety of taxes will have to be withheld from their salaries. Among them are:

  • Withholding. Social Security (FICA), Medicare and federal and state income taxes must be withheld from employees’ pay.
  • Employer matching. Businesses must match the FICA and Medicare taxes and pay them along with employees.
  • Unemployment tax. Businesses must pay federal and state unemployment taxes.

4. Check out Tax Credits 
There are a variety of valuable tax credits available that can reduce your tax liability. These tax credits include Employer Social Security Credit, Disabled Access Credit, Work Opportunity Credit, Research Credit, Investment Credit, and more. Ask your accountant what credits are available for your business.

5. Quarterly Estimated Tax
This area trips up many an entrepreneur and is especially vexing for home-based businesses. Failure to keep up with estimated tax bills can create cash flow problems as well as the potential for punishing IRS penalties. Among the issues are:

  • Who should pay? A business probably must pay quarterly estimated taxes if the total tax bill in a given year will exceed $500.
  • How much should you pay? By the end of the year, either 90% of the tax that is owed or 100 percent of last year’s tax must be paid (the figure is 110% if a business’s income exceeds $150,000). Businesses can subtract their expenses from their income each quarter and apply their income tax rate (and any self-employment tax rate) to the resulting figure (their quarterly profit).

6. Sales Taxes
Most services remain exempt from sales tax, but most products are taxable (typical exceptions are food and drugs). If a business owner sells a product or service that is subject to sales tax, he or she must register with the state’s tax department. Then taxable and nontaxable sales must be tracked and included on the company’s sales tax return.

  • Having what is considered a “presence” in a state is the criteria used by the IRS to determine whether or not you are liable for paying state sales tax.
  • If you do not have a physical presence in another state, but sell items via the Internet or by catalog in that state, you can be subject to a state’s “use tax,” but typically not to their state sales tax. A “presence” in another state does not necessarily mean that you have a retail outlet in that state. If you have an office, warehouse, or employees working for you in that state, the IRS may consider you to have a presence in that state. Make sure you are aware of your sales tax responsibilities in all states in which you are doing business.

We’ll continue with 7-12 in a couple of days.

Business Taxes

As a small business owner, you need to know your federal tax responsibilities. Understanding and complying with tax requirements is a necessary aspect of doing business.  The IRS.gov website for small businesses provides extensive tax information and online tools and resources.

For additional information refer to IRS Publication 583, Starting a Business and Keeping Records. This publication provides basic federal tax information for people who are starting a business. It also provides information on keeping records and illustrates a record-keeping system.

As we discussed previously, when starting a business you must decide what form of business entity to establish. Your form of business (e.g., sole proprietorship, partnership, LLC) determines what taxes you must pay and how you pay them.

The following are the four general types of business taxes.

  • Income Tax
  • Estimated Taxes
  • Self-Employment Tax
  • Employment Taxes

Income Tax

All businesses except partnerships must file an annual income tax return.  Partnerships file an information return.  The form you use depends on how your business is organized. Refer to Business Structures to find out which returns you must file based on the business entity established.

The federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year.  An employee usually has income tax withheld from his or her pay.  If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax.  If you are not required to make estimated tax payments, you may pay any tax due when you file your return.

Estimated tax

Generally, you must pay taxes on income, including self-employment tax (discussed next), by making regular payments of estimated tax during the year. For additional information, refer to Estimated Taxes.

Self-Employment Tax

Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves.  Your payments of SE tax contribute to your coverage under the social security system.  Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.

Generally, you must pay SE tax and file Schedule SE (Form 1040) if either of the following applies.

  • If your net earnings from self-employment were $400 or more.
  • If you work for a church or a qualified church-controlled organization (other than as a minister or member of a religious order) that elected an exemption from social security and Medicare taxes, you are subject to SE tax if you receive $108.28 or more in wages from the church or organization.

Note: There are Special Rules and Exceptions for aliens, fishing crew members, notary public, State or local government employees, foreign government or international organization employees, etc. For additional information, refer to Self-Employment Tax.

Employment Taxes

When you have employees, you as the employer have certain employment tax responsibilities that you must pay and forms you must file.  Employment taxes include the following:

  • Social security and Medicare taxes
  • Federal income tax withholding
  • Federal unemployment (FUTA) tax

For additional information, refer to Employment Taxes for Small Businesses.

This information provides a brief overview from the Internal Revenue Service of issues and decisions involved in owning a small business and avoiding common pitfalls.