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Tax Preparation Guide for Small Business Owners
Tax season is upon us, and it can be a tricky time for small business owners and people who are self-employed. With income from multiple sources, plus expenses, deductions, and investments, navigating your taxes can take precious time you likely just don’t have. Here’s a guide to make preparing your taxes just a little bit easier—think of it as an entrepreneur’s roadmap on the journey to stress-free taxes.
Start with the Basics
When it comes to preparing taxes, start early! That April 17 deadline doesn’t mean you should start gathering forms and information just a few days before. Starting early gives you more time to make sure information is correct and ensures you aren’t rushing at the
last minute.
First—do you even have to pay business taxes? If you earned more than $400 in self-employment income, the answer is yes. If your business was at a loss for the year, meaning business expenses were more than income; you can usually deduct the loss from your gross income. People who are self-employed will likely have to pay self-employment (SE) tax in addition to their income tax at the rate of 15.3%. It’s basically the equivalent of the Social Security and Medicare taxes that traditional employees pay.
Every business needs a tax ID number, which can be attained for free from the IRS. Even people who are self-employed and only work for themselves should have a business tax ID to help separate personal and professional expenses. Companies that have employees are required to have a tax ID and can’t hire employees or contractors without it.
Before filing your taxes, you’ll need to gather records of all your business income and expenses for the year. That can include things like:
- payroll records
- balance sheets
- receipts from business purchases
- business savings account interest forms
- cost of goods sold, including inventory records
- and other expenses
Companies that have used accounting software or a payroll system throughout the year should be able to find the correct information relatively simply. Most accounting software, such as QuickBooks or FreshBooks, can easily generate expense reports for taxes or
even partner with tax reporting software.
One of the trickiest areas for many micro-business owners is navigating payroll taxes. Approximately one-third of all businesses get fined each year for not handling payroll taxes correctly. Many tax experts recommend using a third-party payroll service like Gusto to avoid mistakes that can happen when small businesses handle payroll on their own with spreadsheets and paper. These programs create reports and make sure everything is done above board.
Filing the Right Forms
Successfully preparing taxes starts with filling out the correct forms. Schedule C or Schedule C-EZ are used to report income or loss from a business as a sole proprietor. In general, if you have expenses of less than $5,000 you can file Schedule C-EZ; more expenses require Schedule C. Self-employment tax is reported using Schedule SE (Form 1040). The Schedule C form can be added to your personal tax return for any kind of company except a corporation. The form is only two pages and lists all possible business expenses to help determine your business gain or loss, which is then added to your personal tax return.
Things get tricky when filing as a partnership or a multi-member LLC. These types of companies require additional forms, such as Form 1065 and Schedule K-1 that show each person’s share of the company. In most cases, using a tax professional to help file can relieve much of the headache.
Just like personal taxes, business taxes can be e-filed for quick resolution. Filing electronically also helps funds from a tax return be direct deposited much faster than waiting for a paper check. You can also file by mail by sending paperwork to the addresses listed on the last page of Form 1040.
Common Deductions and Credits
After expenses and revenue has been calculated, taxpayers have the opportunity to write-off certain expenses and get money back through deductions and credits. When growing a business, this is a crucial step that allows the tax system to work for you.
There is a huge number of deductions and credits small business owners may be able to use, but here are a few of the most common entries:
- Home office. In order to count this, the space has to be set aside solely for business purposes and can’t ever be used for personal reasons. But it doesn’t have to be an entire room. If there is a desk or table solely used for work, that percentage of your home’s square footage and the cost of utilities and mortgage can be deducted.
- Office furniture and supplies. Items bought over the year like furniture, copiers, and computers can be deducted in full.
- Mileage. Driving for business can be deducted with careful documentation of the trips that were taken and how far you drove. You can deduct the total mileage or the percentage of work-related car expenses against personal car expenses, like gas, repairs, and insurance.
- Insurance premiums. People who pay out of pocket for health insurance can deduct all of the premiums, but only if you aren’t eligible to get insurance from any other source, including through your spouse’s employer.
- Other deductions include legal and professional fees, advertising, retirement investments, mortgage insurance, contract labor, depreciation, and more.
Most small businesses will benefit more from deductions, but there are some credits that can still apply:
- Business upgrades. If you added eco-friendly upgrades to your office or made it more accessible to people with disabilities, you could be eligible for a credit.
- Hiring new employees. Small business owners who hired veterans and other types of employees can also get a tax credit.
- Health care. Small business owners who cover at least half of the cost of their employees’ health care can get some of those costs back. Companies with at least 10 employees that make less than a certain amount can earn back full credit, and companies with less than 25 employees who earn slightly more are eligible for a partial credit.
Hiring Children
Many small business owners, especially those that are just getting started, take advantage of their children’s labor. Instead of paying them under the table or not even paying them at all, actually hiring your child and creating a W2 can end up saving thousands of dollars at tax time. Experts at HireYourKid.com say that creating a real job description with an annual salary turns child labor into a fully deductible business expense. Even better, children under the age of 18 can earn up to $6,350 in 2017 ($12,000 in 2018 under the new tax plan) and not have to pay any kind of taxes—they don’t even have to file. Creating a paper trail and formally hiring your child is not only a way to save money, it is smart for your family business when taxes come due.
Other Things to Consider
Building a business is time-consuming, but don’t gloss over tax preparation. The IRS can always come back after the fact and audit individuals and businesses years after taxes were filed, so keep a record of everything and make sure it matches your company’s
books. A paper trail keeps things clearer and protects you in a worst-case scenario.
Although it is possible to amend a tax return, it is much easier to include everything from the very beginning, so take time to pull together the necessary paperwork and get prepared before you jump in to actually filing.
If you need more help or have any questions, reach out to our business tax experts. No matter if you’re starting a business or have been around for years, NASE representatives are here to help your tax season go more smoothly.