You think you’re ready. You may feel confident you’re ready to start your new business, but first, here are some things about taxes you need to know and may not have thought of.
Make Sure You Keep Good Records Before You File Your Federal Taxes
Many new small business owners make the mistake of stuffing receipts and bank statements into file folders and sorting them when the tax deadline is near, rather than using accounting software through the year. Accounts often see this mistake, and it makes their job harder if you pay them to do your taxes.
If you use the software, you will avoid expensive errors and make the whole process much simpler. You can even link your business checking account to the software, which will save your employees from having to do a lot of unnecessary data entry. If your financial records are linked to tax preparation software, compiling a federal income tax return will be simpler and quicker. If it is not early enough to get this year’s records into an accounting program, make sure that is a step you take for next year.
It is also good to take these steps to provide financial numbers potential investors and lenders can easily see.
Be Sure to Get a Copy of Your Federal Income Tax Return
Make sure you get a copy of your tax return and discuss it with an accountant. This will help you plan for the future. As an example, if you see a loss, you can take steps to prevent that from occurring in the future. Another advantage of doing this is prior years’ returns can beamended to take advantage of a loss.
Make Sure You Don’t Classify Employees as Freelancers
Make sure you don’t make the mistake of classifying people as freelancers, rather than employees. Some business owners make this mistake to avoid being responsible for Medicare or Social Security taxes or health insurance. True freelancers are much more independent. Employees are under your control.
Be sure you give W-2 forms to employees and 1099s to freelancers to detail their compensation. Freelancers often receive 1099s. The IRS reviews 1099s, and if it sees any unreported income, you will be in trouble.
Make Sure You Claim Your Home Office and Car Deductions, if Allowed
You can only claim an area for a home office deduction, if used solely for business. If so, the deduction can help you save on your taxes.
The IRS knows you use cars for personal and business use. Just be sure to keep a diary of how many miles you drive for business each day and calculate your deduction based on that amount. Many small business owners don’t keep such a diary.
Keep Accurate Records of Payroll Taxes Paid, in Case You are Audited
By being a small business owner, receiving an audit is much more likely. The IRS has identified small business owners as the largest source of uncollected taxes. You could even lose your business because of aggressive IRS policies for past due payroll taxes. The IRS has the legal authority to padlock your door without obtaining a court order, as well as seize your equipment and machinery. In addition, the tax penalties are huge. For these reasons, keep accurate records, in case of an audit, and be sure you pay all your taxes on time. Also, be sure you never borrow from payroll taxes. That is a federal crime.
Do You Owe Sales Tax?
You most likely will owe sales tax, unless you fall into a certain category, such as:
- You are a nonprofit.
- Your sales are all casual. Once your sales rise to the level of a business, you owe the taxes.
- In some states computers and accessories are tax-exempt. The computers, however, must be used to manufacture finished goods to qualify. An accountant can tell you if you qualify.
- Manufacturing sales are tax exempt if you process a product and resell in a different form. In that case, as a manufacturer, anything used in manufacturing is tax-exempt in most states. An accountant can help.
- Some services are tax exempt in some states.
For more information, feel free to contact us.