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Navigating Business Taxes: Tips for New Entrepreneurs

Navigating Business Taxes: Tips for New Entrepreneurs

Starting a new business is an exciting milestone. As an entrepreneur, there’s a lot to learn and understand to make sure your business succeeds, and that includes business tax.

Let’s face it, no one likes paying taxes, but if you don't want the IRS knocking at your door, you’re going to have to file tax returns for your business.

In this article, we’ll cover some tax basics and tips that help break down business taxes for new entrepreneurs.

Choosing the Right Business Structure for Tax Purposes

Choosing the right business structure is one of the first and most significant tax-related decisions you’ll make as an entrepreneur!

Each type of business structure comes with unique tax implications, so it’s a good idea to familiarize yourself with the differences.

  1. Sole Proprietorship: Simple and straightforward, a sole proprietorship is ideal for single-owned businesses. Sole Proprietors carry an additional tax on their net profit called Self-Employment tax. 
  2. Partnership: In a partnership, two or more individuals share ownership, responsibilities, and profits. Partnerships don’t need to pay income tax – instead, each partner will have their income passed down to their individual return by a K-1.
  3. S Corporation: This is a popular choice for small businesses. While it does incur more compliance costs with an additional tax return and payroll requirements, it benefits the owner by avoiding a portion of the Self-Employment tax that a Sole Proprietorship would pay.
  4. C Corporation: A C Corporation is a separate tax entity and pays its own tax at potentially a lower rate than an individual taxpayer. However, an owner may experience a double taxation on dividends paid to them personally.
  5. LLC: An LLC is not a tax entity, but rather a flexible entity that offers liability protection. An LLC is taxed as a sole proprietorship or partnership by default depending on how many members are in the LLC. The LLC can also elect to be taxed as a corporation or S-Corporation, giving you more options to manage taxes effectively.

 A tax professional can help you make this decision taking into account your current financial position, tax considerations, and any retirement or succession planning you may have. 

Learn more: IRS business structures

Keep Organized Records 

Maintaining organized records is one of the most essential bookkeeping tips for small business taxes. Monitoring all the money that comes in and out of your business, along with keeping important documents organized, will make tax season much easier for you. 

Using a separate bank account for your business is also a good idea to keep your personal and business expenses from getting mixed up. This can make it easier to track your business income and expenses, as well as ensure you don’t miss any deductible expenses. Accounting software can help, and many programs offer useful features such as automatic expense categorization and tax report generation.

As for documents, it’s wise to maintain copies of receipts, invoices, asset records, and payroll records (if you have employees). Keep them organized in one place so that you’re ready to go when tax season comes along.

Plan for Quarterly Tax

If you’re a new entrepreneur, keep in mind that you may need to pay quarterly taxes. If you expect to pay $1000 or more when your return is filed, the IRS expects you to pay estimated taxes on a quarterly basis. Paying taxes quarterly helps you spread out your taxes across the year instead of paying a hefty tax bill at the end of the year. 

Many entrepreneurs find it helpful to set reminders for each quarterly due date to avoid late payment penalties, and some choose automated payment options available through online banking or tax software.

Deductions and Credits Every New Entrepreneur Should Know

As a business owner, you have access to deductions and credits that can lower your taxable income. It’s one of the benefits of being an entrepreneur! 

Not taking advantage of these opportunities is among the common tax mistakes new entrepreneurs make, so take the time to understand which ones apply to your business.

Here are some common deductions and credits to be aware of: 

  1. Home Office Deduction: If you use a portion of your home solely for business, this deduction can apply to expenses such as mortgage interest, utilities, and repairs.
  2. Business Travel Expenses: Expenses like lodging, transportation, and meals for business travel are deductible, but they must be documented carefully.
  3. Start-Up Costs: If you’re looking for tax-saving strategies for startups, keep in mind that you can deduct some of your start-up costs. From equipment purchases to business registration fees, deducting start-up costs can help offset the initial investment in your business. 
  4. Retirement Contributions: Business owners can take advantage of retirement accounts such as SEP IRAs or SIMPLE IRAs. These accounts allow tax-deferred growth and can reduce your taxable income.
  5. Commonly Overlooked Credits: The self-employment health insurance deduction and the qualified business income (QBI) deduction are often missed by entrepreneurs. The QBI deduction allows certain business owners to deduct up to 20% of their business income, and the health insurance deduction helps self-employed individuals lower their tax bill by deducting health insurance premiums.

Know Your Limits

You wear many hats as an entrepreneur. It’s part of what makes being an entrepreneur so fulfilling, and stressful! From managing daily operations to planning your business’ future, your time is valuable. 

You may be tempted to file your business taxes yourself to save money, but unless you have a thorough understanding of tax codes, you may end up spending more time on your taxes than it’s worth. Time that could be more productive spent elsewhere in your business.

That’s why it’s important to recognize your limits and know when to bring in a professional when necessary – especially if you don't know how to file taxes. Tax professionals are equipped to manage complex tax issues. They stay up to date on the latest changes in tax laws for new entrepreneurs, so you don’t have to. 

In the long run, a tax professional can save you money through deductions and credits you may not be aware of. And of course, when you dedicate the time you save to doing what you’re best at, it will ultimately benefit your business’s bottom line. 

Related: 10 Key Questions to Ask a Bookkeeper Before Hiring Them

Staying Ahead of Your Taxes

Navigating business taxes can feel complex, but with the right approach, it doesn’t have to be. By choosing the right business structure, keeping your records organized, planning for quarterly taxes, learning about available deductions, and knowing when to seek professional guidance, you can set your business on the right path.

The tax professionals of Chatterton & Associates specialize in helping new entrepreneurs simplify their tax strategy to focus on what they love most about their business. If you need help navigating business taxes, feel free to schedule a consultation.   

Osaic Wealth, Inc. does not provide tax advice. 

Check the background of this firm/advisor on FINRA’s BrokerCheck.