Tax season is a confusing time for everyone. For small business owners, especially those who are new to the business world, it can be especially frustrating.
One-third of small business owners believe they’re overpaying taxes each year, and many more feel overwhelmed when it comes to things like filing and making quarterly payments.
If you’re in this same boat, you’ve come to the right place. Read on for the ultimate guide on how to do small business taxes.
Common Small Business Tax Challenges
Every small business owner’s financial situation is a bit different. However, there are some common challenges that many entrepreneurs encounter when paying taxes, including the following:
Poor Record Keeping
One of the most common mistakes new business owners make is failing to keep accurate records. Poor record-keeping practices can hurt many aspects of your business, but they’re especially detrimental when it comes to paying taxes.
A lack of organization, or a total lack of records, will make it harder for you to take advantage of certain tax credits and deductions. It can lead to inaccurate reporting and potential penalties from the IRS, too.
If you’re not taking advantage of all the tax credits and tax deductions available to you as a small business owner, there’s a good chance you’re paying more money to the IRS than you should.
Business owners can deduct a lot of expenses from their annual tax bill (things like office expenses, fees paid to independent contractors, miles traveled for business, etc.). If you want to be accurate with these deductions, though, you need to have receipts and other documents verifying them.
It’s true that many business owners overpay taxes. However, some also run into the problem of underpaying. Again, as with overpaying, this can happen when you’re not keeping accurate records.
Small business owners also end up underpaying when they fail to pass the sales tax that they collect along to the IRS. They might get hit with an underpayment penalty as well if they don’t make quarterly tax payments on time.
As a business owner, it’s up to you to pay the IRS estimated tax payments every quarter. If you don’t do this, you’ll owe a large sum of money when tax season rolls around. You’ll also most likely get hit with a penalty on top of that large sum.
Misclassification is common among new small business owners, too. They might misclassify their business, which could lead to them paying taxes that they don’t have to pay.
They could also misclassify employees.
If they list an independent contractor as an employee, they could end up paying more taxes than are necessary. On the flip side, they could end up being guilty of tax fraud if they misclassified an employee as an independent contractor.
How to Do Small Business Taxes
There are some things you can do as a business owner that will simplify the tax-paying process and help you ensure you’re not paying more than is necessary. The following are the most important steps you ought to take this year:
Know Your Business Structure
The first step to paying small business taxes in the proper way is to know the specific structure of your business.
Is it a sole proprietorship? LLC? S Corp or B Corp?
Remember, each business structure has its own specific tax requirements, so it’s important to get this right.
Get the Proper Forms
The next step is to make sure you have the proper tax forms for your specific business structure. You can find tax forms online through the IRS’s website. If you’re using a tax preparation software, you’ll also be able to access the forms through it.
Again, be sure to double-check that you’re using the correct forms for your type of business. Otherwise, the tax filing process will be a lot harder than it has to be.
Keep Detailed Records
It’s imperative that you keep detailed records throughout the year.
Don’t just stuff all your receipts into a box and hope for the best. Set up a filing system that makes sense for your business and makes it easier for you to take advantage of specific deductions and credits when filing your taxes.
If you haven’t set this up, start going through your documents now and try to get them organized. The sooner you do this, the better off you’ll be.
Take Advantage of Tax Deductions
Now that you’ve gone through all your finance-related documents, you should have a clearer idea of which tax deductions are applicable to you. Be sure to take into account lesser-known tax deductions, such as interest on loans and the cost of insurance.
The more you can deduct, the less you have to pay. Make sure your deductions are accurate, though. Otherwise, you could end up getting audited by the IRS and forced to pay a penalty (or worse).
Pay Outstanding Taxes
As a small business owner, especially if you’re a new business owner, you likely will owe the IRS money your first year. Don’t panic if this happens to you.
The IRS makes it easy for you to pay what you owe through their website. You can even set up a payment plan if you don’t have enough money to pay for everything at once.
Work With a Professional
When in doubt, reach out to a tax professional for more information. You don’t want to play fast and loose with your small business taxes.
Contact a CPA and ask for their assistance, especially when it comes to things like claiming certain tax deductions and credits.
Overcome Your Tax Confusion Today
It’s common to feel confused when it comes to paying your taxes as a small business owner. You’re not on your own, though.
If you remember the tips outlined above, you’ll have a much easier time figuring out how to do small business taxes while also making sure you’re not paying more than you should.
Do you want to learn more about paying taxes or handling other aspects of your company’s finances? If so, visit the Money & Finance section of our site today.