Starting a small business is an exciting endeavor. You get to do what you’ve dreamed of with no limit to your income. But it also comes with headaches, including dealing with often complex and shifting tax policies and situations.
In this blog, we discuss the top five tips for new small business owners.
Business Structure Matters
How you structure your business has enormous implications for profitability. As a small business owner, you need to watch every penny. Success relies on achieving more revenue than expenses; taxes are a significant expense. Choosing the proper structure severely impacts how much you’ll owe.
You can choose between several options:
Sole Proprietorship
A sole proprietorship is the easiest because it requires no extra steps beyond filing your personal income taxes as a self-employed person. A sole proprietorship may suit your needs if you are only making small or no profits. However, once you start making more than side-hustle money, a sole proprietorship leaves you paying Uncle Sam far more than most business owners want.
For instance, with a sole proprietorship, you bear the full brunt of hefty self-employment taxes. These can be cut down to size by creating an LLC.
Partnerships
Filing as a partnership makes sense as it is simple. However, as with a sole proprietorship, consider upgrading to an LLC as your income increases. You will be glad you did at tax time.
Limited Liability Corporations
LLCs are an excellent option for small business owners. They are affordable for small businesses and even sole proprietors. You can significantly reduce self-employment tax and enjoy other substantial tax benefits. Also, you shield your assets in case your business faces legal liability.
Separate Personal and Business Finances
To gain the protection of an LLC, you need to separate personal and business finances. Also, separating them keeps your business organized for tax time. Commingled funds can be challenging to disentangle. As a result, you may spend hours on this unpleasant task and still find it impossible, resulting in higher taxes and possibly penalties.
Record-Keeping is Crucial
When the IRS audits your business–and chances are this happens eventually–you must have accurate records. When tax agents find records are missing, they compensate by assuming the maximum possible tax advantage to the IRS if those records were present, then add higher penalties based on this assumption. You could pay many times more than you should.
Ensure an organized system for collecting and maintaining your business records, such as receipts, invoices, payroll, travel expenses, and other costs.
Understand Deductions and Credits
Tax deductions and credits are a vital component of business profitability. As with any significant expense, taxes must be managed carefully. If not, your hard-earned revenue can slip through your fingers.
Small business owners can take advantage of various tax deductions and credits, such as for office supplies, utilities, business-related travel, and health insurance premiums.
Quarterly Estimated Taxes
Unlike W2 employees, small business owners need to pay quarterly estimated taxes if they owe taxes of $1,000 or more in April. If no payments are made, the small business owner may be forced to contend with a massive bill at tax time, plus penalties.
Why Hiring a CPA is Essential
A CPA is more than a bookkeeper. Where a bookkeeper keeps track of the inflow and outflow of money for various accounts, a CPA takes a proactive approach to enhancing business profitability, including through tax planning, balance sheet analysis, and expense reduction plans. CPAs offer advice tailored to each client’s specific needs.
Time-Saving
Small business owners wear many hats, and days can become hectic quickly. They must be nimble, and shifting priorities are part of life. This leaves them little time for studying tax codes, tracking small expenses and revenues, and filling out tedious forms. A CPA handles all these tasks so that you can focus on your business.
Avoiding Penalties
Tax-filing mistakes can lead to financial penalties and even legal problems. A CPA ensures accurate and timely filing so your business avoids the impact of time-consuming audits and dreaded tax penalties.
Peace of Mind
Knowing that a competent professional is handling your taxes allows you to focus on your business with the peace of mind that you comply with all laws and make sound financial decisions. It’s essential to ensure your business succeeds and you can sleep at night. While hiring a CPA involves an expense, the benefits far outweigh the costs, providing immediate and long-term advantages for your small business.
To learn more about how a CPA can help with your small business, Tax Avenger in Canton is the ideal tax and accounting firm to connect with. Call to schedule a Free Consultation today.