Well, it's that time of year again. Time to lose some weight? Well, yes, that too. But no, it's time to start thinking about taxes. Of course my friends here at Greatland are tops when it comes to helping you sort out your 1099 and W-2 tax needs, so instead of diving deep into that area, what I want to do instead this month is offer some general tips and strategies on business taxes to help you as you get your returns in order.
Most small business people in fact do not have a great handle on taxes, even if taxes are so important to their business. I just read a story in the paper this morning, talking about a large local mattress dealer with 11 stores who was going out of business. Why? They failed to pay sales taxes that they should have been collecting but didn't and owed the state $2 million in back taxes.
So lets start with the basics. Here are four tax rules all small businesses should know:
1. Deductions. As you likely know, you can deduct all “ordinary and necessary” business expenses from your revenues to reduce your taxable income. Some deductions such as business travel, equipment, salaries and rent are obvious. Others are not. Don't overlook these potential deductions:
- Trips that combine business and pleasure. If more than half your trip is devoted to business, you can deduct the cost of travel, as well as other business-related expenses.
- Business losses. Depending upon your legal structure, business losses may be able to be deducted against your personal income to reduce your taxes.
- Purchases financed by business loans or credit cards. You can deduct such costs this year even if you won't pay off the loans until next year. You can also deduct the interest on the loans themselves.
2. Employee Taxes. If you hire employees, you need to pay, or withhold from their salaries, a variety of taxes, including:
- Unemployment. Federal and state unemployment taxes must be paid.
- Withholding. Social Security (FICA), Medicare and federal and state income taxes must be withheld from employees pay.
- Employer matching. You must match the FICA and Medicare taxes and pay them along with your employees.
3. Quarterly Estimated Taxes. This area trips up many an entrepreneur. Failure to keep up with your estimated tax bill can create a slew of IRS penalties. You should pay quarterly estimated taxes if you expect your total tax bill in a given year to exceed $500. How much should you pay? By the end of the year, you must pay either 90 percent of the tax you will owe or 100 percent of last year's tax.
4. Sales Taxes. Most service businesses are exempt from sales tax, but most product based businesses are not. If you do sell a product or service that is subject to sales tax, you must register with your state's tax department. Then you must track your taxable and nontaxable sales and include that information on your sales tax return.
In my next blog, I am going to share some tips on procedures that can make your tax life easier, and which can help you avoid an audit.
(For even more business tips and strategies, check out the new podcast on iTunes that I am doing in conjunction with Greatland called Small Business Success with Steve Strauss, Powered by Greatland.)