Tax season is often not so anticipated part of the year among entrepreneurs, especially if you’re new to filing taxes for a business. That’s the most important piece of advice when filing startup and small business taxes is that you will need to be stickle for paperwork. The key is to set aside time to learn what tax issues usually bother businesses similar to yours, to avoid making the same kinds of mistakes yourself. This article will provide answers to the most common questions you will have when dealing with taxes for the first time.
Pull Your Financial Records
Staying on top of your bookkeeping includes maintaining a copy of every invoice that goes out and every receipt that comes in. If you are not organized well enough, this may be quite a lengthy process. financial documents that need to be set aside for startup taxes include profit and loss statements, bank and credit card statements, invoices and receipts, and payroll sheets. Many other records will be required, but these few should give you a good start. Gathering these items on the go, assures you have a much smoother tax season every month, as you won’t have to waste time going through it all at once.
Plan your LLC Tax Structure
A limited liability company (LLC) is not a separate tax entity like a corporation, instead, it is more like a partnership (multimember) or sole proprietorship (one member). Domestic LLCs run by one owner is considered a sole proprietorship. Those with two or more owners are treated as a partnership unless they have chosen to be classified as a corporation. The LLC itself does not pay any federal income taxes, even though some states do impose an annual tax on these companies. Members of LLC are considered self-employed owners and not the employees of the LLC so they are not subject to tax withholding.
Know What you Can Deduct
When starting a small business, you will want to save money any way you can. For many start-up business owners, this means deducting as many expenses as possible, and the good news is, a lot of start-up costs are easily deductible. The first rule for deductions is that they must be ordinary and necessary, meaning it has to be commonly related to your line of work. This includes the costs of training staff, legal fees, establishing vendors and suppliers, advertising. Traveling for business is another amazing deduction possibility that takes care of plane tickets, taxis, hotels, and meals.
Keep Track of Paperwork and Receipts
Creating the habit of good organization early on as a business owner will help you more than just handling paperwork during tax season, but will also improve your career as an entrepreneur altogether. It is essential to keep track of all the relevant paperwork in one place and save each receipt that came your way. To help you out with these tasks just click here, and you will find the best software available that automatically scans your past year’s purchases for tax-deductible expenses, making it so much easier to keep track of it by having it all in one place.
Watch How you Classify your Employees
Defining the people who work for your company is another aspect that comes into question around tax season. Generally, employees have a right to worker’s compensation, unemployment insurance, minimum wage (at least), overtime pay, and payroll taxes. For a start, you have to make sure that all the workers in your company are labeled correctly, as they can work for a company as employees or independent contractors. If the roles aren’t clearly defined and you mislabel your employees and independent contractors, it could be seen as an attempt to avoid paying payroll taxes, which leads to penalties and back taxes.
Separate Personal and Business Expenses
A deductible expense only does you good if you can prove that the money is spent on what is crucial for running the business. Many business owners are trying to deduct a home office for tax purposes but it has been quite an issue with the IRS. To get a deduction for a home office, it must be organized as a separate office used solely for business purposes. After you make it clear which purchases were made for business purposes, it is very important to separate them from the personal expenses along the way. Not doing this from the start will cost you a lot more down the line, as you will have to go through every receipt, instead of simply building a report from your business banking.
As much as starting your own business sounds exciting, it brings much boring and complicated paperwork alongside, including taxes. Hopefully, this article will help you get through the tax season smoothly, especially if it’s your first time handling it.