If you own a new small business and this is your first time to file an income tax return for that business, the Rules of Thumb blog from MoneyThumb wants to make sure you understand the following 4 very important things about federal income tax and small businesses:
- You Are Responsible For Self-Employment Taxes–A small business owner is considered a self-employed person by the IRS. That means you have to pay self-employment tax, but don’t be too alarmed, as a business owner you can claim half of what you pay in self-employment tax as an income tax deduction, so for instance, a $5,000 tax payment decreases income by $2,500. Additionally, it’s important to take advantage of all possible business and startup expenses to limit net income and, by extension, your self-employment tax burden.
- The Type of Business You Are Affects Income Tax Return–The legal entity you elect to form can have a tremendous effect on your tax liability throughout the years. From sole proprietorships and LLCs to S corporations and partnerships, there are various business types, each with its own benefits and limitations. For example, S corporations offer small business owners the advantage of paying taxes at the shareholder level, rather than being subject to higher corporate rates. However, a company of this kind must be limited to 100 shareholders and feature a single stock class. On the other hand, while C corporations can deduct a wider range of expenses and include hundreds of shareholders, these groups must contend with double taxation.
- You Should Be Making Estimated Payments Throughout the Year–As a new small business owner, you probably know that it’s important to pay taxes accurately and on time. However, you may not realize that self-employed persons are responsible for making quarterly estimated tax payments throughout the year. While startup founders are excused from making estimated tax payments in the first year of operation, they are responsible for submitting accurate quarterly payments in the years to come. Business owners filing as sole proprietors, partners, and S-corporation shareholders must all make estimated tax payments if they anticipate owing $1000 or more for the tax year.
- You Have the Opportunity For Lots of Deductions–From materials to employee salaries, to business rent, to utilities, the various operational costs of a startup can be overwhelming. Fortunately, as a new small business owner, you may be able to deduct a number of expenses in order to minimize your business taxes while maximizing company profits. According to the IRS, businesses can deduct expenses deemed both ordinary and necessary. Some of the most common business deductions include rent on a business or home office, supplies, furniture and equipment, such as computers, copiers and fax machines. Additionally, many small businesses can deduct costs associated with providing healthcare benefits for their employees. As a NEW small business, make sure you take advantage of all startup expenses. The QuickBooks blog has a definitive list of all the startup expenses you may be able to take advantage of.
As a new small business, you may want to consider having a professional accountant handle your income tax return, at least this first one. They know all the ins and outs and little-known ways you can save yourself from paying out more money than necessary to the IRS.
If you decide to handle your income tax return yourself, MoneyThumb has great PDF financial file converters designed specifically for small businesses that will assist you in getting all your financial information in order quickly and seamlessly.