Taxes can be a headache for anyone. But, as a small business owner, wrapping your head around the process of filing business taxes, for the first or fifth time, can be confusing at first.
When running your small business, you may find it necessary to minimize your business's tax bill as much as possible, and make sure you're making deductions wherever possible.
When planning out your tax plan, here are a few important things to consider.
Defining Business Income
Before making too many deductions, it's important that you have a strong understanding of what you can define as "income;" so, be sure to remember that your gross income refers to all of your income regardless of the source you derived it from.
- Services and goods can be labeled as income for your business. If you trade or barter for services, the market value of the goods you received should be included in your reported business income.
- Constructive income refers to anything that is available to you, regardless of if you utilize it or not. For example, if you receive a check at the end of the year but don't deposit it for the next year, you will still be responsible for taxation at the time it was received.
- Those excluded from your income include: gifts and inheritance that are not specifically earned by your business. Many fringe-benefits provided to business owners and employees are also covered by this title.
- Return of capital investment also is not considered taxable income. If you sell an asset and get your money back in exchange, only the resulting profit is considered taxable.
Examine Your Business Structure
Your business structure is critical to success, but is almost important to look at when figuring out your business taxes. Some smaller businesses and those who act as individuals can be eligible for tax breaks. Do you qualify?
- Sole proprietorships, partnerships, or LLCs have lower income-tax rates, which make them more desirable.
- Though income tax rates might be lower, independent business owners still have to may self-employment taxes, and don't get to split the cost like corporations do (where employees pay half and the company pays half).
Take Advantage of Deductions
Your business will likely require certain expenses, from rent to payroll, and much more. Some valid business tax deductions include:
- Reasonable allowance for salaries or other compensation for services
- Travelling expenses including meals and lodging while in pursuit of business
- Rental use for business purposes; the deduction allowance is dropping to 25,000 as of January 1,2013.
Good Record Keeping
Like in any aspect of business, it's important to keep thorough and organized records of your tax information. Keeping good records will allow you to access information more easily, and can support your case if audited by the IRS.
Complying with employee tax requirements is essential for keeping your business afloat. If you run into a sticky situation with calculating payroll, it could lead to unhappy workers or worse, expensive penalties.
- Withhold Social Security tax (6.2% of wages) and Medicare tax (1.45% of wages) on each paycheck as well as other necessary deductions.
- Deposit employment taxes to the government either electronically or by check deposit to a bank.
- Pay your employer share of FICA taxes, which are the same as the employee share.
As small business owner, you have more tax obligations than the regular individual. Be sure that your finances are in order and your payroll is all checked out; but don't forget to take advantage of the small business-friendly deductions, as well.