It’s hard running a business. There are multiple aspects you must oversee and manage as a business owner. Not only do you need to keep your business afloat, but every year you must go through the dreaded tax season, which brings out a considerable amount of anxiety and confusion for many small business owners. That’s why we’re breaking down the best tax tips and practices for lowering your tax bill. Take a look at these eight tax tips for your small business.
Top 8 Small Business Tax Tips
Remember to always consult with a CPA or tax advisor at the start of your fiscal year, so you know what to expect when tax season arrives. Let’s dive in on how to reduce your business liabilities and put more money in your pockets.
Hire The Right Accountant
The most important small business tax tip is to hire a trustworthy and skilled accountant or tax advisor to help you with your taxes. Hiring the right accountant can mean the difference between a stress-free tax return and a formidable audit. Before deciding on an accountant, have an introductory phone call to see if they’re the right person for the job.
Correctly Classify Your Business
Each business entity has its pros and cons. By choosing the correct business structure, you can potentially save hundreds or thousands of taxes each year. On the other hand, failing to classify your business properly could result in you underpaying or overpaying taxes. However, changing your business structure is no easy task. If you decide to elect a new tax status or business entity, consult with an attorney and accountant to determine which filing is best for you.
Keep Track of Receipts and Records
Hopefully, at the start of the year, you’ve kept track of all your business records and receipts. Doing so at the very beginning will save you headaches when it comes time to calculate your business expenses. The best way to keep track of all your business-related purchases is to open a business account and make all your purchases through that account. Your personal finances should never mix with your business’s and vice versa. Keeping them separate not only helps you reduce problems but may even help you build more robust business credit scores.
Know Your Tax Requirements
As a business owner, it’s vital to understand your federal, state, and local tax requirements. Knowing your tax conditions will help you file your taxes accurately and make any tax payments on time. When starting a business, the business structure you choose will determine what taxes you’ll pay and how you pay them. Depending on your business, you may owe:
- Income Tax
- Estimated Tax
- Self-Employment Tax
- Sales Tax
- Payroll Tax
- Excise Tax
Hire and Pay Your Child
If your business structure is classified as a sole proprietorship or a partnership with your spouse, a tax strategy may lower your business’s tax bill. If you hire and pay your child under 18 a salary or hourly wage, that amount may be claimed as a business expense. Another tax advantage for hiring your kid to work for your small business is that your child may not have to pay FICA or FUTA taxes. Before you hire any underage employee, review the child labor laws for your state and federal too.
Set Up a Retirement Account
Any contributions to your own or employee’s retirement savings account may be tax-deductible up to a limit. Contributions to your employee’s retirement plans like a 401(k) or IRA can save your business on payroll taxes because this lowers the amount of employee wages subject to FUTA. It’s a win-win situation where you and your employees can both save for retirement while your business benefits from a generous deduction.
Research and Take Advantage of Tax Credits
The state and federal government offer tax credits exclusively to small businesses to promote economic growth. Consider these tax credits to be your money’s best friend as they can be a powerful way to reduce how much you owe in taxes directly. These small business tax breaks are limited to how much revenue your business generates, the number of employees, the type of business you operate, and other criteria. For a list of business credits and how to claim them, check out the credit list here.
Claim Deductions and Write-Offs
People often confuse tax credits with tax deductions. These are not the same thing – but combined, they do both save you an enormous amount of money. Commonly referred to as write-offs, tax deductions lowers your taxable income and thus reduce your tax liability. Depending on how many deductions you claim, it may even put you in a lower tax bracket. There are plenty of small business write-offs, so take advantage of those deductions that you’re entitled to, as they can add up quickly!
Bonus Tax Tip: File Your Taxes Early
Don’t wait until Tax Day to complete your tax returns. There are several benefits of filing your taxes early, like the potential to receive eligible refunds earlier or more time with your tax preparer to submit accurate returns or plan for tax payments. Keep in mind that the deadline for federal and state tax filing varies each year, so be sure to check your state’s Department of Revenue website and the IRS.
The information in this article is obtained from various sources and offered for educational purposes only. Furthermore, it should not replace the advice of a qualified professional. The definitions, terms, and coverage in a given policy may be different than those suggested here. No warranty or appropriateness for a specific purpose is expressed or implied.