Managing Your Business
Startup Taxes Guide for At-Home Business
When you’re busy getting a home-based business off the ground, startup taxes may not be top of mind. Taking the time now to learn the ins and outs of at-home business taxes can save you a considerable amount of money and lots of headaches later on.
Failing to understand your tax responsibilities can lead to underpaying taxes, resulting in stiff penalties and lost business startup tax deductions. This tax guide for startups will help set your company up for success.
Business Taxes to Anticipate
When you work for an employer and get a regular paycheck, your taxes are taken care of through automatic deductions. As your own boss, you’re responsible for paying your own taxes. That requires familiarizing yourself with the taxes that you must pay the IRS as part of doing business.
Small business owners must file an annual tax return that includes self-employment tax and income tax payments, including Social Security and Medicare payments. These same taxes are withheld from employee paychecks automatically, but since you’re now the boss, you need to pay these taxes yourself. You also need to pay income tax, which is a tax on your income. The amount you pay is a percentage of your income and is dependent on how much you earn and your business structure.
Once you’ve been in business for a year, you will also need to begin paying estimated quarterly taxes. IRS guidelines state that you’ll be charged penalties if you don’t pay enough estimated tax. Estimated tax is paid in four equal amounts throughout the year.
You may also need to pay other taxes as a small business owner, such as local and state taxes, sales tax on goods and services sold, property tax on business property, excise tax, dividend tax on corporate shareholders, if you have any, and employment and payroll taxes when you hire employees.
Business Startup Tax Deductions
One of the highlights of being your own boss is writing off a wide variety of costs associated with running a business. This includes startup costs, which are applicable even before your company is officially up and running.
According to IRS guidelines, startup costs eligible for write-off need to be expenses a business could deduct if they would pay a similar fee to run an active business. The deduction must also be a cost incurred before the business officially opens.
Allowed startup expenses include costs for market research to see if a business idea is viable and what potential customers may want and need; advertising for the opening of the business; salaries and wages for employees being trained; fees for professional services; as well as travel expenses for visiting potential customers, suppliers, and distributors. You can also write off the costs of setting up a business structure, such as an LLC.
Home Office Tax Deduction
If you’re conducting business from home, you may be able to take a home office tax deduction. The IRS has two criteria you must meet. You must use the home office regularly and exclusively for conducting business, and your home must be your primary place of doing business. If you meet these criteria, you can use the home office deduction and save money on taxes.
There are two methods to choose from when calculating the home office deduction. The simplified method allows for deducting $5 per square foot of your home used for business, to a maximum of 300 square feet. This amounts to a maximum write-off of $1,500. On Schedule A of your tax return, you can also claim other home-related expenses, such as mortgage interest, real estate taxes, homeowner’s insurance, homeowners association fee, utilities, WiFi, and repairs, cleaning, and maintenance for the office space.
The second option for the home office tax deduction allows for the same write-offs but involves a more complex process for determining the deduction amount. Determine what percentage of your home’s overall square footage is used for office space, and then calculate how much you spent on various operating costs for the year, such as utilities and repairs. You then claim 10% of that total.
When it comes to repairs and maintenance costs for your home office deduction, you can only write off those expenses directly related to your home office. So, if you have the flooring replaced in your home, the only deductible portion is in your home office space.
Additional Ongoing Tax Deductions
Once you open for business, there is a wide array of recurring and one-time business expenses you are allowed to write off. The expenses must be deemed ordinary and necessary to run your business to qualify. For instance, if you’re a website content creator, you need a computer, software, email program, internet access, and phone.
Familiarizing yourself with the following business expenses can help you save a lot of money on your business tax return. Acceptable small business tax deductions include:
Office supplies and expenses. This category encompasses any expenses that arise while conducting business, such as computer paper and printer cartridges, pens, paperclips, postage, and cleaning supplies.
Advertising and marketing. Whatever expenses you incur while getting the word out about your business is tax-deductible, including digital ads of all types and marketing communications.
Website and social media management and maintenance. If you’re paying someone to maintain your website and perform SEO and other such services, those expenses are tax-deductible.
Auto expenses. You can write off the associated costs whenever you use your car to conduct business. This includes gas, mileage, parking, lube and oil, maintenance, and repairs.
Business insurance. Take out a business liability insurance policy, and you can claim the full premium you pay.
Banking fees. Any fees you pay while performing business banking are tax-deductible. This includes monthly service fees and special services like safe deposit boxes, checks, wire transfers, and money orders.
Interest. If you need to borrow money for your business, the interest may be tax-deductible.
Legal and professional fees. Most small businesses require the assistance of professionals, such as lawyers and accountants. Whatever you pay them for consulting about your business can be written off.
Professional development. If you are taking continuing education courses to improve your business, the fees for the classes are tax-deductible. This also pertains to the dues for professional development organizations in your industry.
Telephone and Internet expenses. Any money you spend on your telephone and WIFI to conduct business is tax-deductible.
Travel expenses. If your business requires travel, you can write off expenses like gas, mileage, meals, and lodging.
Cost of goods sold. If you manufacture and sell products, you can write off some of the production, transport, materials, and storage expenses.
Donations. Consider donating rather than tossing or selling equipment and inventory that you can no longer use. Donating items such as old computers and supplies can result in tax deductions for your company.
In addition to deductions, there are what is known as capital expenses. These include business assets and improvements. They are not deducted. Instead, they’re considered a business asset and must be listed on your company balance sheet and depreciated over time. That means you get a tax benefit over several years for such investments in your company.
Purchase a Tax-Filing System
Suppose you’re just starting out with your business. In that case, chances are you don’t have the budget to hire an accountant, bookkeeper, or tax advisor just yet. Tax software systems such as Swyft Books allow you to act as your own accountant. Such systems help you prepare and file your taxes and offer a backup of your tax filing and records.
Organize Company Tax Information
Organizing supporting tax documents now saves you hours when it’s time to file your taxes. As far as the IRS is concerned, the burden of proof for tax deductions is on you. You must show proof of expenses in the form of receipts. That means having those receipts readily available and organized is essential.
Keep all receipts for tax-deductible items in one place. Paper receipts should go in a file folder, and digital receipts can go in one of the many digital receipt apps on the market. These apps often allow you to scan paper receipts, allowing you to create digital copies that can also be stored in a digital filing system organized by receipt type. That way when tax time comes you aren’t sorting through piles of receipts. That way, when tax time comes, you aren’t sorting through piles of receipts. This will also help ensure that you don’t miss any write-offs. Choose a digital receipt storage system that syncs with tax-filing software for expediency.
Choose a Corporate Entity
The type of business structure you choose for your company significantly affects your taxes. The sooner you decide on a corporate entity, the better your tax status.
If you’re the only owner of your business, you can run a sole proprietorship. However, there is a risk involved when you operate this way. If you were to be sued by a customer, that person could go after your personal and business assets as a sole proprietor. Business entities such as LLCs protect your personal assets should you find yourself in a lawsuit.
Partnerships, LLCs, and S Corporations are known as pass-through entities. That means that the company’s profits and losses are passed on to the business owners, who are then taxed on them. For instance, if you open an LLC, you will pay your company taxes through your personal income taxes. Such a tax structure can save you a substantial amount of money in taxes. C Corporations, on the other hand, are taxed as independent entities. This means that owners may be subject to double taxation.
Tax Ramifications of Hiring Employees
If you need help running your business, it’s advisable to understand the tax ramifications before hiring anyone. When you employ traditional employees, you take responsibility for paying several taxes, including Medicare and Social Security. Other expenses include paying for disability, medical, life insurance, and potentially a company retirement plan. Such costs can quickly mount, putting a big dent in your profits.
Rather than hiring full- or part-time employees, consider using independent contractors. Such individuals work independently in their own offices when you need them, and they are available. Such workers are also known as 1099 employees. In tax terms, that means that they pay their taxes at the end of the year, and you pay them for their services. You will need to file forms 1099-MISC or 1099-NEC for any contractors you pay more than $600 in a year.
Experience Tax Savings with a Retirement Plan
As a small business owner, it’s important to remember that you are in charge of your financial future. With that in mind, it’s advisable to contribute to your retirement account. The good news is that when you do so, you can save money on your tax return.
Contributing to a traditional IRA retirement account, SEP IRA, or 401(K) will reduce the amount of taxes you need to pay while putting money away for your future. To determine which type of retirement account is best for you, you may need to consult with a tax advisor or certified public accountant (CPA).
Running an at-home business is exciting enough without having to worry about taxes. Keep these tax tips in mind, and you’ll find that organizing and filing your taxes runs smoothly and efficiently. Streamline the process even more by filing for an LLC with Swyft Filings today.