Entrepreneurship can be exciting. Being in control of your business and watching an idea you have grown into something that solves a problem, helps other people, and puts money in your pocket can bring a sense of satisfaction that very few other things can provide. However, there are several routines and mechanical aspects of entrepreneurship that are not as enjoyable but are necessary. One of these things is paying business taxes. The following are five things you should know about paying your business taxes.
1. Your Legal Structure Matters
When you form your business, you need to be aware of the legal structures that are available to you and understand how these impact the amount of taxes you will have to pay. If you started your business as a single individual and now are working with partners, it may be a good time to reevaluate how your business is structured with the goal of providing maximum protection and minimizing tax liability.
Sole proprietorships are businesses where you are the only owner. This is the most common type of business structure in the United States. It is also one of the riskiest because as a sole proprietor, you are solely responsible for all tax obligations. On the plus side, recent tax legislation allows sole proprietors to deduct 20 percent of their business net income against their taxable income to reduce liability. Other tax structures include S corporations, C corporations, limited liability companies, and partnerships.
2. Take Advantage of Tax Deductions to Minimize Your Tax Bill
Especially if you are a small business owner, you are interested in doing things to minimize your expenses with the goal of stretching your finite resources. One way to do this is to maximize your deductions and minimize your tax bill.
As a business owner, there are several things that you can deduct from your taxes, including business travel, vehicle expenses, the depreciation of assets, insurance, utilities, and more. Some business owners shy away from taking deductions that they are entitled to because they worry that it will trigger an audit. However, if you keep the proper documentation and only take deductions that you are entitled to, you should feel free to deduct as much as you can to lower your tax bill.
3. Pay Quarterly Taxes
April 15th, or in the case of 2020, July 15th, is a day that many small business owners hate because it’s tax day. However, according to the IRS, partners, sole proprietors, and S corporations should pay quarterly estimated tax payments if they think they will owe the IRS over $1,000 when they file their federal or state taxes.
The IRS makes it easy for you to figure out what your estimated payments will be by using form 1040–ES. Once you have figured out your estimated taxes, there are several ways to pay the IRS. You should make one payment every quarter, so that would be on April 15, June 15, September 15, and January 15.
4. Claim All the Income That Is Reported to the IRS
If you do freelance work and you make more than $600 from one customer, they will send you a copy of the form 1099 miscellaneous. The IRS will also get a copy of the 1099 you receive. They will match the income that you report against what the individual who hired you said they paid you. If the two numbers don’t match, it can be a red flag for the IRS. If an audit is triggered, tax resolution services may be needed to address any issues the audit raises.
What if a client does not send you a 1099? Do you still need to report that income to the IRS? Absolutely. You are responsible for reporting all the income you receive, regardless of its source, to the IRS every year.
5. Keep Your Personal Expenses and Business Expenses Separate
One of the biggest mistakes small business owners make is not having a separate account for their business expenses and their personal expenses. If the IRS audits you and they see that your personal expenses and your business expenses are intermingled, they might inspect your personal accounts because your money is co-mingled. It’s better to have a separate bank account, debit card, or credit card for your business and only use that for your business expenses.
Running a business is hard. Managing taxes can be complex. The best results are seen when businesses stay on top of their taxes throughout the year as opposed to putting things off until tax time.