Who hasn’t dreamed of quitting their day job, starting their own company, and living happily ever after? Abrasive bosses and questionable decisions can make a normal nine to five job grow stale pretty fast. Today, more people than ever are enjoying the freedom that comes with starting a small business and being their own boss, but what about the taxes? How much should you pay, and how often? What can you claim as business expenses? What can be deducted?
One good thing about those regular, nine to five jobs is that they take care of tax payments for you by withholding them from your paycheck. If you start up a small business of your own, you will be responsible for withholding your own taxes and paying them on a different schedule.
Sole proprietorships, the category which many small businesses fall under when they are created, have relatively simple tax rules. The sole proprietor pays estimated taxes four times a year. If they fail to pay quarterly, they will be penalized at tax time, to the tune of 8% of their annual income. Those who fail to pay their taxes at all can expect the IRS to come knocking – literally or figuratively, depending on how much they neglected to pay. To avoid the dreaded audit, make sure to keep meticulous records of your income and business expenses, and pay your taxes on time. Tax payment coupons can be printed from popular tax software programs, or downloaded from the IRS web site.
This is more inconvenient than having your taxes withheld from the get-go, but small businesses also get special tax benefits that you won’t enjoy as someone else’s employee. If you do most of your work from home, you can claim a deduction for your home office, including the depreciation on the space. Remember, a home office doesn’t have to be an entire room. Part of a room will suffice. Rent can also be claimed as a business expense. The forms can be confusing, though, so be sure to read them carefully and enlist a tax professional if you need help.
Self-employed workers can also write off business equipment purchases as tax deductions, to a maximum of $18,500 per year. If you need a better computer to keep up with your business needs, you can feel good about buying one, because it counts as a valid business expense. Contributions to retirement plans are also deductible. And don’t forget the expenses you incur from marketing, advertising, and promoting your business. Gasoline and auto repairs can be deducted if you use your car for your business or if you have a company-owned vehicle. Office supplies are another deduction.
Other, less tangible expenses can be used as tax deductions. These include the interest and fees from carrying credit card debt on business expenses. This area gets tricky, though, so I recommend hiring a professional to help you wade through the forms and procedures.
Tax rules get a little more confusing when you hire employees. A husband and wife can work together and maintain a sole proprietorship, but if you hire an outside employee, you’ll need to apply for a tax identification number from the IRS. Then you will be responsible for keeping records for each employee, withholding the appropriate amount of tax from their wages, and paying it to the government. The good news is that you can deduct the employment taxes you pay.
To find out more about the tax rules and tax benefits that apply to you, take a look at the IRS web site. Other great resources exist online. All you need to do is a little research to avoid getting caught up in a tangle of tax trouble.