Small Business Coaching: Tax Basics

small business person accounting their taxes

The best and worst thing about running a small business is that you’re responsible for everything. While there’s a certain freedom that comes with this, there’s also an often overwhelming level of responsibility. Everything from finances, to staffing, to advertising, will fall squarely on your shoulders. You’ll have to be willing to accept the many challenges that come with running your own small business. For entrepreneurs all over America, these challenges are well worth the rewards that come with being your own boss. However, what many small business owners continue to be daunted by is the prospect of handling their company’s taxes. Needless to say, dealing with taxes for a business is a lot more complicated than just filing your personal taxes! We’re here with some of the tax basics for small business to make the task a little bit less stressful.

What Do I Have To Pay? 

Businesses have to pay a variety of taxes, rather than a simple blanket income tax. You’ll be taxed on a variety of aspects of your company; for example, you’ll have to pay unemployment taxes if you have hired people to work for your small business. If you are selling items, such as through a storefront, you’ll also need to calculate the sales tax that you owe. Payroll taxes, Social Security, and Medicare (FICA) will also be required.

In addition to these, there are a few other forms you’ll need to file for your business. First, you’ll want to fill out an SS-4 form to receive an Employer Identification Number, or EIN. You’ll use this number on most of the other forms that you fill out. You’ll fill out a Form 1040-ES to calculate your income tax, form 940 for Federal Unemployment Tax, and you’ll be required to withhold federal income taxes from the wages of your employees.

Who Are My Employees? 

Sometimes, there’s confusion as to who exactly the “employees” of a business are. The rules are different depending on if you have full fledged, W2 employees, or contractors that require a 1099 form. Each employee of your business will be required to fill out a W4 form, informing the IRS of their withholding allowances, any exemptions, and their marital status. You’ll be required to withhold their federal income taxes and pay into Social Security and Medicare. For non-employees who are being paid by your company, including independent contractors, freelancers, and consultants, you’ll have to send them IRS Form 1099 if they made more than $600 from you in any given year. In this case, you’re not required to withhold anything and the contractors themselves will have to report their own income. But how do you tell whether someone working for you is, legally speaking, an employee or a contractor? Usually, an employee is someone who is specially trained to work for your company, on your job site, and regularly receives direction from you. If they receive benefits from your company, then in the vast majority of cases they’ll be considered a W2 employee and not an independent contractor.

Deductions

Another common question is that of deductions. What, exactly, can you deduct? What even is a deduction? Well, if you write an expense off, you’re subtracting it from your total taxable income, meaning you owe the IRS less. Which costs and expenses can be written off on your taxes, and which cannot? Usually, you can deduct any business expenses that come up. What exactly constitutes a “business expense” is pretty broad; travel, equipment, raw materials, and legal fees can all be written off. However, it’s not quite as simple as simply deducting the cost of whatever you spend. You’ll usually only be able to deduct up to $5,000 in the first year for each of your startup cost. Any remaining cost will have to be paid off over the following years. We highly recommend seeking the help of a tax professional if you have complex expenses that you have questions about.

Getting Further Help

Seeking the help of a professional tax adviser is highly recommended to maximize your deductions and minimize the amount you owe, especially when you’re just starting out. A professional tax adviser will make use of the most up-to-date software, be aware of the latest laws and regulations, and be able to make educated, professional recommendations regarding your company. This will leave you free to make other critical business decisions, without spending a lot of manpower stressing over your taxes.

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