Small businesses are the cornerstone of what make America great. Small business growth and expansion has been on the increase for years, in fact, 47.2 percent of all employees in the U.S work for a small business. While starting a small business in the U.S. may be easy, keeping it profitable over the long-term it is not so simple. One way to help is to make sure you make the most out of your tax situation which will help add to your bottom line. Here are some tips to get you started:
Paying taxes as you go -- The U.S. tax system is a prepay system of taxes. While employees are required to have their Social Security, Medicare, and income taxes withheld from their tax return, you -- the business owner -- are required to prepay your taxes through quarterly estimates. Not making estimated taxes can cost you additional money at filing time when the penalty for not prepaying your taxes is assessed. The underpayment penalty is the applicable federal rate (AFR) for each quarter your taxes were underpaid. A simple best practice to avoid this penalty is to estimate your taxes based on the business each quarter and get your tax payments in on time.
In addition to your penalties for late payment of your estimated taxes, the IRS will penalize you up to 100 percent of the taxes due if you don't make your payroll tax deposits on time. Payroll taxes are the employees federal income tax withholding and both employee and employer share of Medicare and Social Security taxes. The penalty is stiff because the deposit is monies that you are keeping in trust for another taxpayer, your employee. Pay your payroll tax deposits first to avoid the high penalty for delaying or forgetting to make your payments.
Recordkeeping -- The IRS requires documentation of all your deductions, including information such as who joined you for a business meal and the nature of the business, where you were going when you traveled during the year, and other simple-to-comply with rules for many of the common deductions business owners incur. Many small business owners, and individual taxpayers as well, don't remember to keep all their receipts and a diary of their business engagements and expenses -- which causes you to miss out on deserved deductions. Make sure you keep good records including a daily log and receipts. It does not take much time and you are saving yourself taxes in the end.
Use a professional for legal and/or tax advice as you need it -- Spend your time where it is most valuable -- making your business successful and providing the best product or service in your market. It is not a best practice to try to do everything yourself -- even in the short time of start-up or beginning a business. The chances are good that you need the expert services of a local small business in areas such as marketing, bookkeeping, law, and taxes. The cost of missing a tax deduction or credit, or even worse, claiming a deduction or credit you don't qualify for, can be high. A tax professional that specializes in small businesses is aware of the available deductions and credits, the annual changes in tax law that affect your business, and when and how to make your estimated payments and other regular tax deposits. Let the pros guide you when it isn't your area of expertise, it can easily be one of your best investments in your business and in many cases will likely pay for itself -- either with pure tax savings, business guidance or simply freeing you up to focus on the real important parts of your business. Use a professional where a professional is needed.
Determining the correct business type - There are many types of business structures including; sole proprietorships, partnerships, spouse partnerships, subchapter S corporation, and C corporations and each of these businesses has their own set of tax rules and considerations. It will save you time and money if you ensure you have the right business type set up before you start business. This allows you to operate in a clean continuous manner without worrying about changing your employer number, and the way your internal business operations work. Also the business type you choose can have tax, business liability, and legal implications as well as implications bookkeeping and paperwork. So get good advice and start out with the best entity for you and your business and look to the future for what makes the most sense.
Employee vs. Contract Labor or subcontractors -- Probably one of the biggest areas of confusion and error for small businesses is classifying employees and workers. Many businesses prefer the relative ease of hiring contractors because the bookkeeping and job support personnel needs are much less substantial when you have contractors since there are no real payroll or payroll taxes to withhold or periodic business filings with IRS and other government agencies. Of course, your choice cannot, and should not, be based on ease of paperwork.
The IRS has guidelines governing the difference between an employee and contractor. The IRS rules rely on, among other things, the amount of direction, physical work location, tools needed for the job and who provides them, and many other things to determine if an individual is a contractor or an employee. If they find that you schedule the employee's working hours, determine how the job is done, and/or provide the materials and tools to do the job, you may end up in a reclassified situation for your workers. This means you would now owe the employer share of Medicare and Social Security taxes as well as federal, and possibly state, unemployment taxes among other payments and penalties. Remember, the IRS can penalize up to 100 percent on late payroll tax deposits unless a valid explanation is available, and misunderstanding of the rules rarely works. In addition, many states have unemployment compensation and worker's compensation insurance requirements that may also be late and subject to a penalty. Finally a recent more common practice is for many workers to now report their employer to the IRS and other agencies in order to recover back payments to social security and other lost benefits.
There are many considerations to starting and running your small business. Many things you can control and many other things you cannot. One element you most certainly can manage is to hire professionals when you need them, especially when it comes to your taxes and financial considerations. After all, financial health is the base of your business, and taxes play a large role in that health.