27 Apr 5 Small Business Tax Myths
Let’s imagine a world where taxes take care of themselves, and small business owners never have to worry about navigating the jungle that is tax season. It would be nice, wouldn’t it? Unfortunately, that isn’t a reality likely to happen anytime soon. Small businesses, and the taxes that are tied to them, aren’t going to go away.
But there’s good news, too! Even if you’re not sure where to get started with taxes for your small business, choosing to face them head-on can be the first step to successfully moving forward. To kick things off, try avoiding these five small business tax myths.
1.There’s No Easy Way To Reduce Your Taxes
It’s a common misconception that taxes are something you have no control over. But the fact of the matter is, there’s a lot you can do to reduce your tax liability. The best place to start is to create a system that accurately tracks the income and expenses of your small business. If you’re looking for an effortless way to do this yourself, try signing-up for an online accounting software, such as Xero.
Remember, the system you create should include a way to collect and store receipts and invoices, as well as helping you keep track of any recurring expenses so you have easy access to the information during tax season. You’ll also want to ensure that you’re up-to-date with any laws that may affect your business.
If you’re looking for more automated resources to make this process easier, check out our guide to automating your bookkeeping!
Another way to maximize your tax efficiency is to make sure you know which deductions you qualify for. While every business is different, you should always look into whether you qualify for common deductions, such as:
- Home Office
- Telephone and Internet
- Business Entertainment
- Bank Fees
- Business Travel
- Business Use of Your Car
- Health Insurance
- Business Interest
You can also save by sourcing your income into other venues, such as contributing to a retirement plan or deferring some income in the current year in order to accelerate deductions.
Another option is to give employees benefits, rather than monetary raises. While lump-sum payments given to your employees will be subject to taxes, if you instead put it in the form of, let’s say, medical insurance coverage, you can avoid income tax, FICA, medicare, and unemployment taxes.
If you’re looking for another resource on ways to reduce your business taxes, you can find more information in our year-end tax checklist, as well.
2. All Workers Are The Same
And while we’re on the topic of employees, let’s talk about the importance of knowing which category each of your workers falls under. There are two main types of worker tax classifications that are important to review when you’re deciding to bring someone onboard.
This is one of the most common types of workers. As an employer, you are required to withhold, deposit, report, and pay employment taxes for them. You’ll need to provide all employees with a W-2 by January 31st showing how much they’ve been paid throughout the year.
A worker is considered a contractor if you control or direct only the end result, not how the work is done or what is done (specifically) by the worker. These workers are subject to self-employment taxes, which they take care of themselves. Unlike with employees, small businesses are not responsible for withholding or reporting any taxes on behalf of independent contractors. If you’ve paid an independent contractor more than $600 each year, then you will need to issue them a 1099.
3. All Taxes and Deductions Are Created Equal
There are tax requirements and exceptions that you’re probably overlooking as a small business owner. Don’t worry, we get it – taxes can be confusing. But overlooking these 3 things can result in some pretty serious consequences, so it’s important to make sure that you’re not overlooking these three tax requirements:
Personal Vehicles Expenditures:
You’ve probably seen someone driving around in a mini-van with their business name stuck on the side, as a decal, but slapping a sticker on a van doesn’t mean that all of that vehicle’s travel is exempt.
When claiming a personal car or truck for your small business, you have two options: Claim the actual cost or follow the IRS standard mileage rate. It’s important to note that these rules apply to travel between your first business stop of the day and a second stop, but do not apply to travel between your home and your office/first business related stop for the day.
It can be easy to think that “startup costs” for your business includes anything that you used to start your company and items such as rented space and electronics are fully deductible, but that’s not the way it works when it comes to taxes.
The cost of things like computers, rented space and equipment cannot be deducted until the business actually starts doing the work it was created to do (typically when you’ve made your first sale). And after that point, you can only deduct your first $5,000 in startup costs and another $5,000 for organizational costs, but this option is only available if your total startup costs come to $50,000 or less. Otherwise, you’ll have to deduct the total cost over 15 years.
A lot of small business owners either charge the wrong amount for sales tax, or ignore sales tax altogether, but it’s important to pay attention if you live in one of the 45 states that requires collecting sales tax. Ignoring the problem will only make it bigger when it comes time to file, so make sure that you check the taxes required for your state.
4.It’s Impossible To Prepare For Next Year’s Taxes
As we’ve talked about before, the key to making your taxes easier is to be prepared. Hiding in a corner, ignoring the inevitable tax deadline, will do nothing to help you feel prepared once it rolls around. Here are some of the most important steps in being ready when tax season rolls around:
1. Keep track of your business income and expenses, and make sure they’re in a separate bank account from your personal account.
2. Set funds aside, starting RIGHT NOW. Don’t wait until the last minute to be slammed with expenses that need to be paid. Find out how much you should be saving each month, in order to be more than prepared, when tax season rolls around.
3. Have a question? Ask! Don’t wait until the next deadline to ask questions about what you may owe, and what your options are. As you work your way through the year, make sure to have resources to ask questions.
5. You Can Leave All The Work To Your Accountant
Leaving all the work to your accountant may sound like a fairy tale, but the reality is that your business is just that –your business. It’s important for your to keep account of your tax information and to stay involved in the process, even when someone else is being brought onboard to manage it.
While accountants and bookkeepers are there to help you, you sign your taxes saying that all information is correctly documented, meaning it’s in your best interest to make it so.
And finally, make sure that the accounting and tax help that you bring onboard is a trusted and true source for accounting. Whether it’s us, at SimpleKeep, or another resource, this is one of the most important decisions for your business, and should be thought through carefully.