Small business owners know how stressful it is when tax season comes around. This year, don’t wait until the last minute. Start now to get your business records organized in time to prepare your tax return. The tips below can help you get more organized, save on tax preparation costs, and potentially lower your overall income tax burden.
Take a home office deduction
If you have a home office that you use strictly for business purposes, you can deduct that space to save money on your taxes. Using the IRS simplified “safe harbor” rule, you can multiply the square footage of your home office by $5 to get your deduction amount.
Hire family members to work for you
Hiring a family member to help with business tasks is a great strategy to save money on staffing costs. But it also lets you take a business deduction for the wages you pay them, and that’s less money you’ll have to spend on taxes.
Make your retirement contributions before applicable deadlines
If you’re self-employed, reduce your taxable income by putting extra cash toward a traditional retirement account. You save now because it reduces your taxable income, resulting in a much smaller tax bill.
Use payroll tax software
Over 40% of small business are fined each year for payroll-tax related issues, and they end up paying an average of $850 each. Using software to calculate payroll taxes and get reminders to pay them on time can result in significant penalty savings.
Commit to a filing system
Setting up a filing system to keep all your paperwork in one place will remove the stress that tax season can bring and save you money, too. Buy a dozen expandable folders and label one for each month, and file all receipts, deposit slips, and everything else into that folder to make tax time a breeze.
Understand startup costs
Startup costs for your small business aren’t deductible until you make your first sale. And even then, you can only deduct up to $5,000 in the first year of business. The rest is deducted over a period of 15 years.
Do the math to see if the standard or actual method for automobile deductions is better for you. For 2018, the standard method allows you to deduct 54.5 cents per business mile, plus tolls and parking. The actual method involves adding up your actual automobile expenses and then multiplying it by the percentage of business use. To find out more, visit the IRS website.
Deduct business-related meals
Taking a client out to lunch? That’s a business expense. So is ordering pizza as a special treat for your staff. And you can deduct 50% of the cost of meals that are business-related, making this a great tax-savings tip.
Using independent contractors rather than employees
Hiring an independent contractor instead of an employee will save you money on benefits and payroll taxes. Just make sure you meet the legal definition of an independent contractor. Otherwise, you could face penalties.
Don’t forget about self-employment taxes
As a small business owner, you’re responsible for paying your self-employment taxes. It adds up to 15.3% of your earnings and includes 12.4% Social Security tax and 2.9% Medicare tax. You may want to consider making estimated tax payments to the IRS to avoid a large tax bill and possible penalties at the end of the year.
Choose the right business structure
For legal purposes, you can structure your business in different ways. Each will impact how you file taxes and how much you owe when your tax bill comes due. Consult with an attorney and your financial advisor to see if a sole proprietorship, partnership, limited liability company, corporation or S corporation is the right choice for you.
Keep track of business expenses
Deductions reduce the amount of taxes you’ll have to pay when tax season rolls around, but only if you know how much you spent. Keeping excellent records and making sure your costs are “ordinary” and “necessary” for your industry will save you money.
File your taxes on time
Always file your tax return on time to avoid paying fees. Filing your taxes 60 or more days late may cost you a $205 penalty. Using e-filing will give you a confirmation number once the IRS has received your tax return, and this is an excellent way to make sure they’re filed on time and avoid paying the penalty.
Take advantage of tax breaks
There are several tax credits for small businesses that will save you money at tax time. There’s a full list of business tax credits on the IRS website, but a few you should consider are the Work Opportunity Credit, Disabled Access Credit, and Alternative Motor Vehicle Credit.
Stay on top of tax code changes
Check out the IRS video portal for updates to the tax code that could save you money. You’ll get access to information about business expenses, business income, small business taxes, starting a business, and much more. Talk with your financial advisor about keeping up with tax code changes and how it can save you money.
Travel is sometimes necessary for business supplies and expansion, and many of the expenses are tax deductible. If you pay airfare, hotel bills, car rental, mileage, and other travel expenses like laundry costs, you can deduct those costs and save money on your taxes.
Donate unused inventory
Donations of money, supplies, and property are all deductible expenses. If you have unsold or unused inventory, you can donate it and get a tax deduction. If you keep it, then it only costs you more money for storage space.
As an entrepreneur, it’s easy to get wrapped up in developing your product or service. But it’s important to take some time to know how business taxes work and understand the tax implications that affect small business owners.
The cost of running and maintaining a business is high, and the last thing you need is a huge tax bill from the IRS. The more organized your finances are, the more you can focus on implementing these small business tax saving tips to reduce your costs.