Are taxes fun? Not exactly. But understanding the process can make or break your business. Here are a few tips for U.S. businesses.
Tip 1: Start Things Right
Yes, you went into business to be your own boss, follow your passion and carve your niche in the world. Taxes are probably the last thing you’re including in your “Getting Started” list — but they shouldn’t be. As a small business, it’s incredibly important to start everything off on the right foot so that you save yourself costly mistakes down the line.
When setting up your business financials, seek out a trusted tax attorney or CPA to assist with initial filings and to look over your financial plan. Haven’t even thought about a financial plan? It’s time to get things rolling.
Tip 2: Understand Your Payroll Taxes
As soon as you hire your first employee, you’ll need to start paying payroll taxes. These taxes cover things like unemployment insurance, social security etc.
Each year the IRS will inform you of your payroll tax filing timeline. Depending on a slew of factors (including the size of your business, earnings etc.), you may be required to pay taxes annually, quarterly, monthly or semi-monthly. And for your convenience, all payments can be made electronically by you or your CPA (again, a good CPA is important).
Keep in mind, government tax agencies are not a kind establishments to owe money to. If you fail to pay or pay after your due date, expect a penalty. The longer it takes you to pay, the more your penalties — and interest — grow. While all of this may seem simple enough, failure to pay payroll taxes is one of the biggest tax-related items to trip up small businesses. But, it’s not the only one…
Tip 3: Watch Those Deductibles!
Deductibles are great! They help offset the cost of many necessities to running your business and can put money in your pocket. Just don’t get too liberal with your claims. Acceptable deductibles in the U.S. include:
Car Mileage – If your vehicle is used for business-related travel (too and from the office not included), go ahead.
Travel Expenses – You can even include tips and dry cleaning.
Home Office – This one can be tricky. Only make this deduction if you use your home office space regularly for business-related activities If your hoping to include a 60” television and a recliner, think again.
Health Care – If you meet the necessary qualifications, you may be eligible for the Small Business Health Care Tax Credit that can help with employee health care costs.
And here are the things you definitely CAN’T deduct — unless you’re interested in an audit:
Professional Clothing – Yes, even if it’s only worn for work.
Client Gifts – This one is only a half “no”. You can deduct a maximum of $25 per gift. Anything over that amount is out.
Traffic Tickets – Speeding to an appointment or parking in the red to meet a client? Nope, not deductible.
Tip 4: Avoid Tax Pitfalls with Planning
Because of the uncertainties of running a small business , especially in the beginning stages, owners can face some major tax pitfalls. The most common include:
Failure to Pay
All of these risks usually relate to poor financial planning. Particularly in the first years of business, owners should be thinking ahead with estimations on business expenses, as well as taxes. That means starting a business with adequate capital and putting aside earnings to cover unexpected costs. When things are up, it’s tempting to add employees, increase budgets and upgrade equipment. While these are essential parts of any business, owners must ensure they’ve created a financial safety net for the unforeseeable.