Many small business owners assume that because of their company’s size, the IRS is not concerned with them. However, this could not be further from the truth. Small businesses make up a good portion of America’s economy, and the IRS relies just as much on the taxes from these entities as it does on the taxes of larger corporations. For this reason, if you own a small business, it is imperative that you have your business taxes in order. To avoid an audit and remain in compliance with tax law, here are five things you need to know:
You Can Deduct Startup Expenses
Many small business owners don’t know this, but the IRS allows entrepreneurs to deduct startup expenses accrued before they even opened their doors. That’s right: if you invested a significant amount of time and capital into making your business dreams a reality, you can claim those expenses on your return.
You’re Entitled to Other Deductions, Too
Owning and operating a business is expensive. Fortunately, the IRS is a tad bit forgiving in that it allows small business owners to claim several deductions on their business taxes. Employee salaries, rent, utilities, raw materials and a number of operating costs are all expenses that can be deducted on your return.
Your Legal Entity Affects Your Tax Burden
The type of business entity you choose to operate under will affect your overall tax burden. For instance, a sole proprietor may be taxed as any normal employee would be, while the owner of a S corporation may be able to pay taxes at the lower shareholder rate. However, the owner of a C corporation may be subject to higher corporate rates but be able to deduct a wider range of expenses.
You Need to Make Estimated Payments
When you own a business, you cannot just file your taxes at the end of the year and make one lump payment as you would as an employee. Instead, you need to calculate and pay quarterly estimated tax payments throughout the year beginning in your second year of business.
You Need to Make “Self-Employment Tax” Payments
Self-employment tax is for citizens whose income is not subject to employer withholdings for things such as Medicare and Social Security. Once you become self-employed, you become accountable for both your own taxes as well as the portion or withholdings that would typically have been paid by an employer.
Dealing with business taxes can be confusing, but it is important that you sort them out and remain in compliance. If you fail to keep the above in mind, you may find your business the next victim of an IRS audit.