Taxes. We have to file them. Filing personal taxes annually might be difficult, but then you add on your business filings and it’s enough to make you want to run for the hills screaming.
As a CPA, I’ve seen it all. I’ve served clients who filed their tax returns on the wrong forms for years. Imagine having to go back and amend the filed tax returns and create the correct forms for filing.
Some clients don’t file a return because they don’t know what they should be filing. For those clients who owed money to the IRS, it’s safe to say that the government was less than pleased. The penalties and interest alone were enough to keep the client on the straight and narrow for the rest of their lives as entrepreneurs.
I’ve created more amended tax returns than I can count because a client filed their tax return believing they had all the necessary information, only to have a tax document show up in their mailbox right after they filed.
Entrepreneurs have made these mistakes and lived to tell the tale. Use these tips to help avoid the blunders others have made and stay in the IRS’s good graces.
Know What Type of Tax Return You Will Need to File
Perhaps you decide that you are not ready to set up a separate business structure. Don’t worry, you can make the switch should you establish something more formal down the road. In that case, keep track of all of your business income and expenses and file a Schedule C on Form 1040 of your individual tax return. If you have not filed for a separate tax identification number, your social security number will serve as your business’ tax identification number as well.
Perhaps you’ve decided to take the next step and set up an official business separate from your person. You’ve registered, established a business bank account, and acquired a tax identification number. At tax time, these are the processes you or your accountant should put in place.
Although it is a separate entity for business purposes, the IRS considers your business a “disregarded entity” for purposes of filing your tax return. What does that mean? It means that you’ll be doing the same thing tax-wise as if you were filing under your own name. You’d keep track of all your business income and expenses and report them on Schedule C of your Form 1040.
If you started your business with another person (or perhaps more than one other person) you may have decided to set up your partnership as an LLC. This entity is completely separate for both business and tax purposes and the partners are not personally liable for the LLC. Choosing a partnership changes things quite a bit. The LLC will file a Form 1065 by March 15. Once this return is complete, each partner will receive a Form k-1. The Form K-1 is prepared as a part of the Form 1065 and should be distributed to each partner once the Form 1065 is submitted to the IRS. Each partner will use this form to report each partner’s portion of the income and expenses from the partnership on each partner’s personal tax return.
An S Corporation is a similar animal to an LLC in that it is completely separate from its owner. It does, however, have a few tax features that differ. If you have decided to operate as an S Corporation, you will file form 1120S, even if you are the only person involved in the business.
Like a partnership, each member of the S Corporation will receive a Form k-1 from the S Corporation to report income and expense items from the S Corporation on their personal tax returns.
Please note, this discussion does not include a comprehensive list of business entities. These entities are simply examples of the most popular choices. Talk to your tax adviser about the most appropriate choices for your business.
Income Statements from Customers, Clients, and Third-Party Networks
If you do any work for a client or customer that exceeds $600 for the year, you should receive a 1099-MISC which reports your total earnings with the individual or company for the year.
If you use third-party networks such as Paypal or Stripe to collect payment for your products and services, you should receive a 1099-K which documents your payments received through the network over the course of the year.
Don’t Forget About Self – Employment Taxes
Now that you’re self-employed and a business owner, you are now subject to self-employment taxes. If you previously received a W-2, you were responsible for one-half of your Medicare and Social Security, while your employer was responsible for the other half of the tax liability.
If you file a Schedule C, you will pay the self-employment taxes as a part of your tax return. Note that self-employment taxes are paid in addition to regular income taxes.
The Medicare portion of self-employment tax is 2.9% of self-employment income with no income limitation. That means that no matter how much money you earn, it will all be subject to the Medicare tax.
Social Security Taxes (FICA)
Social security taxes are assessed at a rate of 12.4% up to the maximum income level set by the IRS each year. For 2017, the maximum income amount is $127,200 which is 7.3% higher than the $118,500 from 2016.
Estimated Tax Payments: Determining the taxes you owe
The IRS requires that you pay your income taxes ratably over the course of the year. To help facilitate this, the IRS has a system where you can make quarterly estimated payments based on the amount of taxes that you believe you will owe at year-end. If your business is earning money, you will likely need to re-evaluate your earnings every quarter to help you to determine the amount of taxes you will owe. You’ll want to make this a part of your budget.
If you’re keeping your own books and records, I recommend using a bookkeeping software program that helps you do everything from keeping your business and personal expenses separate to filing your quarterly estimates. If you work with an accountant, have him or her review the system periodically.
Track All of Your Expenses. Keep Careful Records
Even if you have yet to make your first dollar, you will want to be sure to keep documentation of everything: printer ink, business mileage. The bookkeeping system should help in automating most of your routine recordkeeping tasks.
Think About Getting Help: Especially if You Have Employees
As you grow, your financial situation will become more complicated, especially as you add other people, like partners or employees to the mix. Payroll taxes, state and local tax issues and other financial complexities can make even the most dedicated business owner run for the hills. Consider outsourcing your financial function to a competent CPA or accountant. An advisor who can help you to navigate your business from a financial perspective is worth their weight in gold. Starting your online venture brings with it a whole host of exciting new ventures. Being prepared at tax time can help to make the adventure that much less stressful.
How to take the stress out of tax time