With the new year comes new resolutions, goals, and … tax season! Actually, as a business owner, it sometimes feels as if it were always tax season. Paying taxes as a business owner can be a hassle, but we’ve got you covered with all the information your going to need this year.
If you are a new business owner, you should know that paying taxes as a business owner is different than when you pay taxes as a W-2 employee.
We made this simple introductory guide to help you navigate the process of paying business-related taxes.
What follows are very general practices. The reality is that every individual’s circumstances are different. There are so many nuances, rules, and qualifying situations that can make any two tax returns drastically different.
With this in mind, you should consult a tax expert in order to make sure that you are including and maximizing allowable deductions, making correct calculations, and paying your taxes correctly as well as on time.
How To Calculate your Business Taxes?
Unfortunately, there is no easy or single answer to this question. You will have to calculate a 15.3% tax to your adjusted gross income as well as figure out your income tax requirements.
If you are a contractor or sole proprietor, you will use this general business tax calculation:
You will take your income (projected or real), subtract the standard deduction, subtract applicable business deductions and expenses to get your adjusted gross income.
Now apply applicable income tax rates to your adjusted income as well as the self-employment tax of 15.3%.
Of course, several things can cloud the above calculations, such as deductions, or if you also make money from another source, like a W2 job.
Again, it may be an excellent idea as well as a stress reducer, to hire a tax expert to help you calculate and make your tax payments as these are just tips to help get you started.
What Can I Deduct From My Business Taxes?
Deductions can save you a lot of money, but you have to make sure your deduction claim is legitimate.
Necessary business expenses
Do you require a computer, phone, car, furniture, appliances, or some other equipment for your business? If the tools you buy are absolutely required in order for you to make an income, you may qualify for a capital depreciation deduction, which allows you to deduct up to 40% of the cost. There are also ‘De minimis’ deductions that apply to tools that cost less than $2,500.
Do you have a home office (or something that counts as devoted workspace)? That’s another potential deduction.
Service fees paid to other professionals that are directly related to your business operations (such as a lawyer, a financial advisor, a writer, or even a consultant) may qualify for a deduction. Costs spend on marketing may also be deducted.
If you hired employees, you may be able to deduct some of those costs. If you hired a military veteran, you could qualify for the Work Opportunity Tax credit. If you did hire employees, you should definitely talk to a tax professional because there are other deductions you can make, depending on how you pay your employees and if you offer certain benefits.
Do you pay rent and/or utilities at your place of business? You might be able to deduct those.
Additional deductions include:
- Theft or damages
- Interest paid on business loans
- Insurance costs
- Costs for required licenses, certifications, and education
- Charitable contributions
When Do I File My Tax Return?
In contrast to paying taxes as an employee, as a business owner, you will have to pay taxes more frequently. If you expect to owe more than $1,000 in taxes, then the IRS requires that you make quarterly payments, also called estimated payments.
Estimated tax payments
Estimated tax payments are how a non-W2 worker pays income tax on income that is not withheld from a paycheck. This is how the IRS defines estimated tax payments:
“Estimated tax is the method used to pay tax on income that is not subject to withholding. This income includes earnings from self-employment, interest, dividends, rents, and alimony. Taxpayers who do not choose to have taxes withheld from other taxable income should also make estimated tax payments.”
Estimated tax payments are due January 15th (paying for earnings from September through December), April 15th (along with income taxes), June 15th, and September 15th. You can pay your taxes before those dates if you wish. Any applicable state taxes will vary state to state.
How do you make tax payments?
So after all this is said, the question remains how do you pay taxes as a business owner? This part is pretty simple.
How Much Does It Cost To File Business Taxes?
Well, this depends a lot on exactly how you file your taxes.
If you file your taxes yourself, the actual process of paying is free if you send the IRS money directly from a checking or savings account transfer. If you pay with a card, there is a small convenience fee applied.
If you are unable to afford your estimated tax payment, you can be placed on installment payments. There is also a user’s fee applied in this situation.
Other tax-related expenses may come from hiring professional help. However, if that person can save you time or money (by finding you deductions and preventing penalty fees, for example), the cost is certainly worth it.
Are You Ready to Pay Taxes As A Business Owner?
Paying taxes can quickly become overwhelming. Just remember that there are a lot of tools and resources out there to help you be successful.
We hope this guide is able to get you started with filing your taxes.
Here’s to your success in 2020!