Dealing with your company’s taxes can be complicated. The tax code changes constantly, which causes confusion and makes it difficult for a business owner to plan. As you approach year-end, there are some critical tax issues you need to consider. Think about how these issues impact your business and personal tax returns.
1. Your company’s structure
If you’ve just started your business, you need to be clear about how your business was formed. The type of business structure you selected has a big impact of your tax filings.
Some business owners are self-employed as sole proprietors. If you’re self-employed, it’s likely that your business activity is posted to Schedule C of your personal form 1040 tax return. You post the details of your company’s profit and loss to Schedule C. The profit is added to any other income (rent, dividends, interest) on your personal return. You calculate taxes, based on that personal income total.
2. Employer vs. independent contractor
If you manage people, you need to be clear about their employment status. If a worker is an employee, your company needs to withhold federal taxes, FICA and other withholdings from their pay. On the other hand, if a worker is an independent contractor, you will not calculate any withholdings. The contractor handles withholding amounts on their personal tax return.
MasterTax tax compliance software shows how a payroll firm can help you calculate the proper tax withholdings. An outside firm can also help you determine if a worker is an employee or independent contractor.
3. Home office deduction
A growing number of businesses are run out of a home office. To claim a deduction for your home office, the IRS requires that you use a portion of your home “exclusively and regularly” for your principal place of business. That home location can also be the place you routinely deal with customers, clients or patients. For the purposes of the IRS, the area used as your home office does not have to be furnished as an office.
4. Estimated payments and withholdings
Regardless of which type of return you file, you should monitor the estimated tax payments you make during the year. The IRS requires that a certain percentage of your total tax liability must be paid through estimated payments.
Say, for example, that you estimate your business profit to be $100,000. Based on that profit, your federal tax liability is $25,000. A percentage of the $25,000 must be paid through estimated payments. Consider working with a CPA to compute these amounts.
5. Tax credit and tax deductions
Tax credits and tax deductions can be a challenging topic for a business. Since the tax laws change constantly, it’s difficult to know which credits or deductions apply to your firm. This is another good reason to consult with a CPA.
It’s important to understand the difference between these two terms. A tax deduction reduces an amount that is subject to tax. If you profit was $100,000 and you subtract a $20,000 deduction for equipment depreciation, for example, your adjusted profit is $80,000. You would pay tax on $80,000, rather than $100,000.
A tax credit, on the other hand, reduces your tax liability dollar-for-dollar. Assume that your tax liability is $25,000. If you have a $5,000 tax credit, the credit would reduce you tax liability to $20,000. A tax credit is more valuable than a simple deduction.
Consider all of these tips as you plan for your taxes at year-end. You may be able to reduce your tax liability and make some effective tax plans for next year.