Whether you are just starting as a small business owner or you have been in business for decades, the world of small business taxes can be confusing and overwhelming. The following are ten tax facts that every small business owner needs to know.
- You are responsible for paying estimated quarterly taxes.
Small business owners and those working in the gig economy, such as independent contractors and freelancers, who expect to owe at least $1,000 in taxes are required to pay quarterly taxes on their estimated earnings. Because of the COVID-19 pandemic, the IRS has extended the deadline both for first and second-quarter tax payment until July 15, 2020. The deadlines for the remaining payments are as follows:
- First & second quarter— July 15, 2020
- Third quarter—September 15, 2020
- Fourth quarter—January 15, 2021
- You are still responsible for paying self-employment taxes.
Self-employed small business owners who have net earnings of $400 or more must pay a self-employment tax to cover the Social Security and Medicare taxes that would typically be deducted from a paycheck by an employer.
- You may be responsible for more than just income taxes.
Depending on the type of business, its location, and legal structure, small business owners may be responsible for various types of taxes, including:
- property taxes,
- payroll taxes,
- sales taxes, and
- excise taxes.
Any misstep in meeting your business’s tax obligations, even if accidental, can lead to severe legal and financial repercussions. Unless you are a tax expert yourself, it usually is best to rely on the advice and assistance of an experienced small business tax advisor.
- Be sure to claim all of your income.
If you operate as an independent contractor or freelancer, you likely receive 1099-MISC forms from your various clients detailing your earnings. The IRS also receives copies of these forms. Even if you do not receive a 1099-MISC, the earnings are still reported to the IRS. You must claim all of this income when filing your taxes. Any discrepancy between what you report and what the agency knows that you have received is a huge red flag.
- Your business structure can impact your tax liability.
While all businesses are required to file an annual income tax return, the legal structure of the business can affect the business’s tax obligations. For instance, sole proprietorships and limited liability companies are taxed at the individual tax rate, while C corporations are taxed at the corporate tax rate. S-corps and partnerships both offer pass-through taxation of profits, but S-corps have more tax benefits for businesses when profits substantialize. A knowledgeable CPA for small businesses can advise you on the tax implications of your particular business structure.
- You may be able to write off your startup costs.
Even if you are still in the process of starting up your business, it may be possible to deduct certain startup-related expenses before your business becomes fully operational. The IRS allows business owners to deduct up to $5,000 in startup costs and $5,000 in operational costs as long as total startup costs don’t exceed $50,000. A small business tax advisor can help you determine which startup and organizational expenses are eligible for deduction.
- Many small businesses overlook deductions.
Although inventory isn’t typically considered a tax-deductible expense, there may be situations where it can be deducted. Examples include businesses that use the cash method of accounting and opt to treat inventory as materials and supplies and certain service-based industries. For instance, salon owners that sell styling products in addition to offering hair cuts may be able to deduct the cost of the inventory.
- Don’t try to outsmart the IRS.
It can be very tempting to try to get an additional deduction here and there. For example, you may want to try to circumvent the 50% limit on meal expense deductions by charging your meals to your hotel room. The IRS is well aware of these tactics and has a variety of ways to identify them, so it is not worth taking a chance. The best way to maximize your tax deductions is to consult with a CPA for small businesses that can identify legal deductions that you may be missing.
- Small business taxes are time-consuming.
The Small Business Administration found that small business owners can spend up to 32 hours annually on taxes. This does not take into consideration the time that it takes to plan for tax obligations and manage cash flow throughout the year.
- A small business tax advisor can be a lifesaver.
The right tax advisor and accountant can not only make sure that all of the necessary tax forms and payments are prepared and filed correctly and on time, but they can also work with you throughout the year to monitor income and spending and help you maximize your business’s financial position.
If you are looking for reliable tax accounting and bookkeeping services in Charlotte, North Carolina, Scott Boyar, CPA, is accepting new clients. Contact us today for more information or to schedule a consultation.