A large percentage of Americans don’t understand how taxes work, and that’s solely when it comes to personal taxes. Staying up to date with your taxes is part of being a small business owner.
Taxes can be incredibly difficult to figure out, especially if you’re just starting out. So, keep reading to find out more about the six tax tips that every business owner should know about.
1. Know the Lingo
Tax returns can be incredibly difficult to understand if you don’t know the terminology and jargon. To better understand your business’s financial position you need to take the time to learn the language.
Some common terms you’ll encounter are:
- Revenue
- Cost of goods sold
- Gross profit
- Net sales
Revenue refers to all the money earned through product or service sales, whereas the cost of goods sold (COGS) is all the money you spent to produce the products or services that you’re selling. Gross profit is what you’re left with after subtracting the COGS from the total revenue. Finally, net sales are the total profit made after deducting all your expenses from the total revenue.
While these terms might have similar meanings, if you mix them up on your tax return you’ll end up in a pickle.
2. Keep Your Finances Separate
The easiest way to ensure you don’t miss any tax deductions is to keep track of your expenses. This is why it’s crucial that you separate your personal finances from that of your business. Open a bank account with a card that is solely for your business.
This way you can use your business card for all business-related expenses. You won’t need to worry about reimbursements, and it will be easier to keep track of all your tax write-offs.
If you mix your business and personal accounts, come tax season you’ll need to go through every transaction you’ve made to determine what is company related.
3. Quarterly Taxes
Quarterly taxes doesn’t apply to every small business. The IRS has guidelines to determine who needs to make quarterly payments, so it’s important to see if you qualify. In general, if you predict your business will owe more than $1,000 at the end of the financial year, you need to pay quarterly taxes.
You’ll need to fill out a Form 1040-ES on these dates when paying your taxes:
- April 15
- June 15
- September 15
- January 15
The best way to ensure you have enough left over to pay your quarterly taxes is to put some money aside each month. This means you’ll be able to build up a windfall in the busier months, to cover any slower periods.
4. Keep the Different Types of Tax in Mind
Quarterly taxes aren’t the only type of taxes you need to pay. As a small business owner that employs staff, you need to report and pay employment taxes.
For each employee you need to consider:
- Social security tax
- Medicare tax
- Federal income tax
When it comes to handling the various types of tax you need to consider as a business owner, you might find yourself lost. While it is possible to handle all your taxes yourself, business tax consulting services exist to help you with this. It’s important that you stay compliant if you want your business to be a success, so take the time to consider how these services can help with tax benefits.
5. Know What’s Tax Deductible
The taxes you pay are determined by your profitability, so you can reduce your profits by claiming business-related items as an expense. But you can’t simply add anything you want as a business-related expense. The IRS has criteria on what businesses can write off as expenses.
To qualify as a business expense, the thing needs to be necessary to running or growing your business and it needs to be commonly used by other businesses in your industry.
Some examples of business expenses include:
- Marketing
- Payroll
- Utilities
- Commercial lease
- Accounting services
- Insurance
- Home office deduction
- Equipment
Your industry will help you determine what can be considered a business expense.
6. Prepare in Advance
The process of doing taxes doesn’t change often. This means you can find all the information you need beforehand and compile all your documents. If the deadline is approaching, you don’t want to scramble for receipts and documents that you need to file your taxes. This just makes the entire process more stressful.
As a small business, there are two dates you need to mark in your calendar. March 15 is for S corporation and partnerships tax returns whereas April 15 is important for personal or single-member LLC tax returns. If you get all your ducks in a row before tax time rolls around, you can take your time carefully filling in your taxes.
The best time to start thinking about taxes is mid-November. The bulk of the year will be over, so you’ll be able to realistically estimate what you’ll owe while still having time left to plan for it.
Tax Tips for Small Business Owners
When it comes to dealing with small business taxes it’s important to know all the ins and outs. Running a small business is hard work, but if you put the work in you’ll see the results. These tax tips will help you get started filing your taxes and getting all your tax deductions.
If you want to get the most out of your taxes, contact us to see how our service can help you. At Propel CFO, we take care of all your accounting and finance needs so you can focus on growing your business.