Eric Tyson - Small Business Taxes For Dummies

Retirement accounts: Taking advantage of retirement accounts can mean tens, perhaps even hundreds, of thousands more dollars in your pocket come retirement time. Offering retirement account access to your employees can also be a valuable employee benefit for recruiting and retaining good employees if they understand what they have. Refer to Chapter 3for more on retirement accounts.

Spending: Throughout this book, I discuss myriad spending decisions you may face in your small business, such as buying equipment ( Chapter 8), spending on employee benefits ( Chapter 2), and so on. These decisions will often affect your taxes both now and in the future.

Protecting your assets: Some of your insurance decisions also affect the taxes you pay. You’d think that after a lifetime of tax payments, your heirs would be left alone when you pass on to the great beyond — but that’s wishful thinking. Estate planning can reduce the taxes that are siphoned off from your estate. See Chapter 5to find out more about estate planning.

Tracking your business financials: Throughout the year, you should stay on top of your business’s income and expenses so that you can see your business’s financial health and record the numbers you need come tax time. Chapter 6covers these important issues.

Even if some parts of the tax system are hopelessly and unreasonably complicated, there’s no reason why you can’t learn from the mistakes of others to save yourself some money, no matter the time of year. With this goal in mind, this section details common tax blunders that people make when it comes to managing their money.

Too many people seek out information and hire help after making a decision, even though seeking preventive help ahead of time generally is wiser and more financially beneficial.

Before making major small business and financial decisions, educate yourself. This book can help answer many of your questions. You may also want to do further research on your own (see Chapter 12) and/or hire a tax advisor (refer to Chapter 13) for some advice before making your decision(s).

If you’re self-employed (or earn significant taxable income from investments outside retirement accounts), you need to make estimated quarterly tax payments. You also need to withhold taxes for your employees and send those taxes along to the appropriate tax agencies. Some small-business owners don’t have a human resources department to withhold taxes and dig themselves into a perpetual tax hole by failing to submit estimated quarterly tax payments.

To make quarterly tax payments, complete IRS Form 1040-ES, “Estimated Tax for Individuals.” This form (discussed in Chapter 10) and its accompanying instructions (and payment coupons) explain how to calculate quarterly tax payments. You can submit payments by mail or electronically through creating/using an online account on the IRS website ( https://www.irs.gov/ ). For more information on the requirement for employee tax withholding, see Chapter 6.

Some taxpayers miss out on legitimate tax write-offs because they just don’t know about them. If you aren’t going to take the time to discover the legal deductions that are available to you and that I discuss throughout this book, then you should pay for the cost of a competent tax advisor at least once. Fearing an audit, some taxpayers (and even some tax preparers) avoid taking deductions that they have every right to take. Unless you have something to hide, such behavior is foolish and costly. Note that a certain number of returns are randomly audited every year, so even when you don’t take every allowable deduction, you may nevertheless get audited! And, if you read Chapter 11, you can find out how to deal with an audit like a pro.

All the tax deductions and tax deferrals that come with accounts such as 401(k)s, SEP-IRA plans, and individual retirement accounts (IRAs) were put in the tax code to encourage you to save for retirement. That’s something that you as a small-business owner should be doing for yourself as well as encouraging your employees to do.

Most excuses for missing out on these accounts just don’t make good financial sense. Some folks underfund retirement accounts because they spend too much and because retirement seems so far away. Others mistakenly believe that retirement account money is totally inaccessible until they’re old enough to qualify for senior discounts. (See Chapter 3to find out all about your small-business retirement account options.)

In the long run, owning a home should cost you less than renting. And because mortgage interest (on up to $750,000 of mortgage debt) and property taxes (up to $10,000 when combined with your state income tax payments) are deductible, the government, in effect, subsidizes the cost of homeownership. (Stay tuned as the state and local tax limit — aka SALT — may be increased higher than $10,000 in 2022.)

If you have a home office, you may be able to take additional expenses on your tax return. If you need a retail or commercial space for your small business, you should compare leasing to buying and be sure to factor in the tax benefits of owning. See Chapter 4for more about real estate and taxes.

As a small-business owner, you should pay attention to how your net income for the year is shaping up for the current year and how things are looking for next year. For example, if you’re in the early stages of your business and you can see that you’ll have more income next year, then it may be in your best interest tax-wise to delay paying some expenses from late in the current year into early next year. (This works when using cash basis accounting.)

Or suppose that you operate on a cash accounting basis and think that you’ll be in a lower tax bracket next year. Perhaps business has slowed of late or you plan to take time off to be with a newborn or take an extended trip. You can send out some invoices later in the year so that your customers won’t pay you until January, which falls in the next tax year.

If your financial situation is complicated, going it alone and relying only on the IRS publications to figure your taxes usually is a mistake. Many people find the IRS instructions tedious and not geared toward highlighting opportunities for tax reductions. Instead, you can start by reading the relevant sections of this book. When you’re overwhelmed by the complexity of particular small-business and tax decisions, get advice from tax and financial advisors who sell their time and nothing else. ( Chapter 13has tips on hiring help.)

As a small business owner, ask yourself how much you’re worth running your business versus how much you’re worth as a bookkeeper. Then ask yourself which task you enjoy more and consider hiring a bookkeeper.