By Shiloh Johnson, CPA and founder of ComplYant, a technology platform giving entreprenuers a simple way to manage tax rules and requirements.
Tax time is no one’s favorite time of year, but it also means added stress for business owners. When you own a business, there is a lot more information to be aware of and tax compliance requirements to maintain so you don’t have the various taxing authorities coming for you. While dealing with tax as a business owner can be tough, we’re breaking it down so that, in thirty easy steps, you can feel good about your tax situation and have a strong idea of how to move forward.
Step 1: Understand how your business structure affects your tax requirements.
Every business structure has different income tax responsibilities. For example, sole proprietors pay tax on their business income through their personal return via Schedule C. If you have a partnership or corporation, you have different tax obligations and paperwork. Through the Small Business Administration website, you can learn more about business structures and how they affect taxes and liability.
Step 2: Have a clear understanding of other business tax types and requirements.
One of the biggest mistakes entrepreneurs tend to make is not having a very clear understanding of what types of tax they are responsible for paying. There are six separate types of business tax to be aware of: federal and state income tax, sales tax, business property tax, annual reports and business licenses. Consulting with a professional can help you determine what types of taxes apply to your business structure based on what, how and where you are doing business.
Step 3: Learn about self-employment tax.
For sole proprietors, being self-employed means being responsible for a lot of your own benefits, like health insurance and retirement. The same is true for Social Security and Medicare. The self-employment tax — at a 15.3% rate — covers the employee and employer portion of Social Security and Medicare. If you work traditional W-2 employment then managing this taxation is typically taken care of for you by human resources: Your employer covers half, while the other half is taken out of your check. Business owners, however, pay for both halves themselves.
Step 4: Know your tax bracket.
How much you pay in income tax can partially be determined by your tax bracket, which refers to the percentage of tax you pay on your income. There are different “brackets” that relate to specific percentages ranging from 10% to 37%. For example, if you earn $40,526 to $86,375 as a single filer, your tax rate will be 22%. Find out more about tax brackets via the Tax Foundation.
Step 5: Set calendar reminders for estimated tax payments.
As a business owner, not staying on top of tax compliance dates can be very costly by way of penalties and interest for non-compliance. That means paying your quarterly estimated payments for federal and state income tax. To make sure you don’t miss the deadlines, set calendar reminders for estimated tax payment dates. Tax deadlines for estimated payments are typically January 15, April 15, June 15 and September 15.
Step 6: Understand business tax deductions.
One way to make self-employment more sustainable is to take advantage of business tax deductions. You should know what qualifies as a business tax deduction and what does not. You can deduct business expenses such as cell phone payments and software subscriptions and may be able to deduct the use of your home or vehicle for business use as well. Learn more about deducting business expenses from the IRS, and if you have additional questions, you can talk to a tax professional.
Step 7: Review state income tax requirements.
You are required to pay federal and state income tax on all revenue earned. Keep in mind there are some states that have no income tax requirement like Texas and Florida. Each state has its own rate system, and if you physically lived in any other state during the course of the year you’ll need to file returns for those states as well. To get a handle on your business tax payments, you will want to know what that rate is and what your local state income tax requirements are. You can check out state income tax rates here via the Tax Foundation.
Step 8: Get your info in order.
Before actually filing your returns, you’ll want to have your tax identification number and previous tax returns nearby. To make things easier with payments or refunds, having your bank account number, as well as the routing number, can help. If you are paying a different type of business tax requirements like sales tax or annual reports you’ll need to have your revenue reports handy as well. Getting your info in order and keeping proper records can save you money and time at filing.
Step 9: Separate personal and business income and expenses.
When you’re just starting out as a business owner, you may think it’s okay to intermingle your personal and business income and expenses, especially if you’re a sole proprietor. But it can make tax time a pain to sift through and try to determine which is which. Do yourself a favor and separate your personal and business income and expenses. You should open a separate business checking and savings account, and use a bookkeeping system to help you track your business expenses. No one wants to go through a box of receipts at tax time.
Step 10: Set up a tax savings account.
Now that you have an idea of what types of tax you are responsible for, you’ll want to make sure that you are segregating those tax amounts as you earn revenue. Setting up a separate bank account can help eliminate overspending. It’s important to think of revenue as only 70% yours, while the other 30% or so belongs to the federal, state and local tax authorities.
Stay tuned for part two (steps 11 through 20) coming soon.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
Forbes – Entrepreneurs