As a small business owner, do you ever wonder why you pay so much in taxes? The answer isn’t as complicated as you think. Maybe you’re not taking the necessary time to properly plan. It could be an issue such as trying to do it yourself, rather than hiring a tax professional, not keeping a tax diary, borrowing from employee withholding, which draws big penalties, not claiming all the legal deductions, or any one of a number of other common mistakes. Here are some of the ways you need to plan to save on your taxes.
You Need to Keep a Tax Diary
Just because you keep receipts, don’t think you don’t need this. This will answer all the questions the IRS might have about entertainment, travel, and other expenses. If audited, this will shift the burden of proof of you doing something wrong to the IRS. A decent tax organizer may cost more than $100.
You Need to Hire a Tax Professional to Help You Plan to Pay Less In Taxes
Don’t make the mistake of thinking you can do it yourself. Don’t think using tax software is good enough. If you are audited, don’t think a representative of the software company will be your advocate before the IRS.
Don’t Borrow From Employee Withholding. You Will Pay, if You Do.
If you’re short on cash, borrowing from the trust fund used for Social Security and employee withholding is tempting, because you may think it’s your money. It isn’t. If you do this, you can face huge financial penalties.
Plan By Compensating Yourself Properly
As a small business owner, you may think you can pay yourself whatever you like. Suppose you double or triple your salary one year. The problem is, if you’re paying yourself $150,000 annually, and you double that after a good year to $300,000, the IRS could disallow that as unreasonable compensation. That could make your small business be taxed at the corporate level, with money distributed as a dividend. To make matters worse, you will owe taxes on the dividend.
Make Sure You Plan to Save By Claiming Every Legal Deduction
You may wrongly think some things are not deductible, even if they are. This is why it is good to use the services of a tax professional. For example, suppose you discuss business with friends at a movie, dinner, or football game. That is deductible. Did you have a suit cleaned for a business conference? That is also deductible, if you were away overnight. Just be sure you document everything in your tax diary.
Don’t Designate Everyone Who Works For You as an Independent Contractor
It is tempting to do this, because independent contractors are cheaper than employees. If you label someone an independent contractor, treat him that way. Independent contractors usually make their own hours and work where and when they want. None of those things are true for employees. Wrongly calling someone an independent contractor can make your business subject to penalties for not withholding Social Security taxes, as well as for more than 40% of workers compensation for a specified time period.
Make Sure the IRS Considers You a Business, not Someone Participating in a Hobby
Imagine you started selling something online, and your “business” consistently loses money. The IRS may consider what you are doing a hobby, not running a business. You won’t be allowed the same deductions.
Plan By Choosing the Right Business Structure
It’s easy to pay more in taxes by choosing the wrong business structure, if you haven’t planned by contacting a tax professional. One common mistake is filing as a C Corporation, which means double taxation for the company. The profit is taxed. When distributed to shareholders as dividends, it is taxed a second time. There are other mistakes small business owners commonly make, which can cost them a lot of money.
Make Sure You Pay On Time
The IRS will typically usually add a penalty of 0.5 to 1 percent per month to an income tax bill, if it’s not paid on time.
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