Chances are you started a business because you had a great idea or wanted to be your own boss, not because you wanted to become a tax expert. Unfortunately, you do have to make sure you’re covered in that area as a small business owner.
Fortunately, there are professionals who can help you. It’s best if you consult with professionals as you’re setting up your business so you’re doing everything right from the start, but if you’ve been playing it by ear to this point, it’s never too late to sit down and get your financial and tax house in order. In this article you will find some tax tips for small businesses.
In the meantime, you can take some steps on your own to organize your finances in between visits with the pros.
Keep Personal and Business Accounts Separate
There are a lot of good reasons to keep separate personal and business accounts even if you’re a sole proprietor. There might be perks available for a business account that personal accounts do not get. It’s easier to track business expenses for tax time. It can be particularly important in keeping loans separate. For example, you might have applied for a small business loan. You may also have applied for a private student loan to pay for your education along with car loans or a mortgage. You do not want to mix the money you receive to pay for tuition with the money earmarked to pay for office space or a photocopier. If your business is audited, the IRS may start digging into your personal accounts if you have mingled them with business, even if you have reported your taxes correctly. Save yourself and your accountant headaches and keep your finances separate.
As a business owner, think in terms of quarters instead of years. Review your financials quarterly and make an estimated payment if you are required to do so. Sit down with the members of your financial team quarterly as well and talk about taxes, how to take advantage of deductions throughout the tax year and any concerns on either side. This can help ensure you remain on the right track and avoid any unpleasant annual tax surprises.
Tax Savings and Deduction Strategies
You can have too little documentation, but you can’t have too much. Get in the habit of saving and filing receipts and making short notes to yourself if necessary.
For example, what was the purpose of a trip or a meal you’re claiming as tax deductible? The chances that the IRS will demand some of this information may be low, but you’ll have it if you need it If you’ve been filing your own business taxes, you might want to have a professional take a look at your work.
The IRS allows you to review and amend the past three years of returns, and there may be deductions you have missed. This is generally low in cost and may reward you handsomely.
To ensure that you aren’t just flying blind when it comes to taxes, sit down with your financial team and talk about the types of deductions you are eligible for, what kind of documentation you need and any other advantageous actions you should take throughout the year to make tax time less painful for your bottom line.
Do the Right Paperwork
From classifying your business accurately to doing payroll right, there are a lot of ways you can make inadvertent errors that can come back to haunt you at tax time. You may want to talk to an attorney about whether your business should be classed as a limited liability partnership, a limited liability company, an S corporation, a C corporation or a sole proprietor.
Once you start adding even one or two employees, things can get a lot more complicated. For example, you need to make sure that payroll taxes are being paid accurately. This is usually best handled by professional, but be sure you choose a reputable company.
It may pay to go back to school and take a few business classes in order to gain the necessary knowledge. If money is already tight from launching your business, private student loans are available to invest in your future.
You also might need to reclassify your business if you are taking on employees. In fact, even if you don’t hire anyone, it’s worth taking a look at the structure of your business every few years to see if it needs to be reclassified. Another thing to keep in mind if you have employees is how benefit plans may affect your taxes.
You may be able to make deductions based on some benefits. However, from business structure to payroll tax to deductions, don’t assume that what worked last year will work this year. The old saying is that the only certain things are death and taxes, but the truth is that tax laws are ever-changing, and your strategies will need to change as well.
Put the Kids to Work
Depending on your business structure, there may be tax advantages to hiring your teenage children if they are under 18 and make under a certain amount.
This is another item you should check with your accountant, but this can be a great opportunity to teach them about responsibility and entrepreneurship while also potentially saving on payroll tax. You’re also keeping money in the family, and their wages could go toward college savings or bills that you normally pay, such as their phone bills.