Small businesses face a bigger tax burden than their larger counterparts. It’s not because they pay more in taxes, it’s because the cost of compliance is 67% more for small businesses.
Many of the accounting responsibilities fall on small business owners to handle. This takes up time and leaves many unprepared to handle tax issues.
If you’re in a similar situation, you’ll want to keep reading. Find out what the main income tax for entrepreneurs business tax facts and stay out of tax trouble.
Table of Contents
1. Self-Employment Taxes
As soon as you register your business, your tax responsibility changes. As an employee, you would see withholdings for FICA.
The federal government requires that you pay 2.9% for Medicare and 12.4% for Social Security. Your employer would pay half and you would have half withheld from your check.
Since you’re self-employed, you’re responsible for the entire amount. That comes out to 15.3% of your profit.
2. Missing Estimated Tax Payments
Do you expect to owe more than $1,000 in federal income taxes? If you do, you need to pay quarterly estimated taxes.
It’s not just estimated federal taxes that you have to worry about. States and even some municipalities require quarterly payments.
If it’s your first year in business, you should work with your tax advisor to see how much you should pay. After that, take the amount of tax owed for the year and divide it by four.
Don’t have a tax advisor, yet? Get one as soon as you can and read this to learn how to choose a tax advisor.
The best thing you can do for your business is to have a separate bank account just for taxes. Deposit a percentage into that account each time you receive money.
That alleviates the stress of coming up with a large chunk of money every quarter.
3. Misreporting Income and Expenses
It’s easy to get confused by what you can deduct and what you can’t deduct as a business expense. The majority of businesses file their personal and business tax returns together.
They file their personal income taxes on Form 1040 and Form Schedule C, which show business income and expenses.
Make sure you document all income, including cash payments. You also don’t want to misclassify a personal expense as a business expense.
The best way to guard against tax issues is to maintain great records. Maintain receipts for every business expense, and make sure you can justify that as a business expense.
For instance, if you attend a business lunch or coffee, write a note on the back of the receipt. Mention who you were with and the business discussed.
Ready to Handle Common Tax Issues
Taxes are a major part of starting and running a business. You can avoid common tax issues by learning what they are. It makes working with a tax professional easier and you’re prepared to handle any tax issues.
Do you want more tips to help you start your business? Check out the other great articles on the blog today!
