Tax season is approaching, and as tax laws continue to change, every business owner needs to know business tax basics.
Tax season is approaching, and every business owner needs to know business tax basics. As tax laws continue to change — especially with the recently passed Tax Cuts and Jobs Act of 2017 — it can be difficult to know where to begin.
Don't worry. Business tax basics are, well, pretty basic. Some of the most important steps you can take to ensure that your taxes are completed properly involve simple organization and preparation. Follow these steps to get your taxes done on time and correctly.
Make Sure Your Business Is Operating as the Right Entity
Your business could be classified as a sole proprietorship, LLC, corporation or other type of organization — and whichever entity you choose will impact your tax obligations. Consider talking with an accountant or business consultant to make sure you've chosen the proper structure for your business now and in the future so you can take advantage of the tax laws that benefit each type.
Pay Estimated Taxes Throughout the Year
Many business owners are required to pay estimated taxes every quarter, based on their business earnings. It can be easy to overlook these quarterly payments or underpay the amount owed, but it's important to make the payments in order to avoid late payment fees and penalties for underpayment.
Take the Deductions You Deserve
Business owners qualify for a number of tax deductions to reduce their tax liabilities, but many fail to take them. You may qualify for a home office deduction, automobile deduction, deductions for startup costs and other deductions. If so, make sure to take them.
Distribute Appropriate Forms On Time
If you have employees or hire freelancers or contractors, you'll need to report their earnings to the IRS. For employees, you must file a Form W-2, while for each contractor, you'll need to file a Form 1099. It's important to make sure you're classifying employees and contractors appropriately — if you misclassify them, you could be subject to penalties.
Ensure You've Paid All Necessary Payroll Taxes
If your workers are bona fide employees, you're responsible for paying several taxes on their behalf. For instance, you need to make sure you've paid payroll taxes, including Social Security, Medicare, unemployment taxes and disability insurance.
Pay Yourself Properly
As a business owner, the way you get paid will depend on your business structure. If your business is a sole proprietorship or a partnership, for instance, you shouldn't get a W-2 salary — instead, the earnings of the business are passed directly to you as the owner. So if you've got yourself on payroll, you're probably paying unnecessary payroll taxes on yourself. However, if your business operates as a corporation, you do need to take a salary on the payroll — otherwise, you'll get hit with additional taxes and penalties.
If you've set up your business properly and you've kept good records, your business taxes don't have to be difficult. Just take time to learn the rules that apply to you and get help from a professional if you need it.