When you own your own business, filing your taxes at the end of the year can get confusing. First-time entrepreneurs often don’t think about how taxes will impact their business until they’re facing a large bill, so it’s important to plan ahead and prepare for what you will owe on your business income.
Understand How to Hire and Classify Employees
When your business is ready to bring on employees to assist with the day-to-day tasks, the way you hire and classify them will impact how you are taxed. Freelancers, also called 1099 employees or 1099 contractors, are hired to work on specific projects in their own environments. Employees, whether full-time or part-time, work hours that are dictated by the company and earn regular paychecks.
If you hire a freelancer but expect them to work in the office during business hours, the IRS could determine that this individual is actually a full-time employee. In this case, your company will get stuck with a hefty penalty and tax bill due to the unpaid Medicare and social security taxes. Make sure to classify employees correctly and stick to the requirements laid out for each classification.
Deduct Taxes From Every Payment
When you receive any business income, the first thing you should do with the check is set aside a percentage for paying taxes. Most business owners make estimated quarterly payments on their expected tax bill at the end of the tax year to plan ahead for what will be required.
You may choose to set up a separate tax account, which helps with the “out of sight, out of mind” concept that could prevent you from dipping into the funds for other expenses. If you are facing tax debt that you can’t pay, your business may qualify for some of the IRS tax debt relief programs.
Separate Your Accounts
From the moment you launch your business, you need to maintain a separate business bank account. Running a company from your personal account creates confusion and could put you in a tough position with the IRS if you were to face a business audit. Mingling your personal and business funds could put you and any other business owners, members, or shareholders personally on the hook for business expenses. The funds in your business bank account should only be used for business expenses, and vice versa.
As the owner of the business, you’re responsible for tracking all the financials, at least until you can hire a CFO. Make sure to maintain a file with all your invoices, receipts, and business expenses so you can pull them up if you ever face an audit. You should also think about the financial future of the business, including the projections for the company over the next few years and whether you will need any financing now or in the future.
By following these tips, you can avoid financial mistakes as an entrepreneur and be prepared for what taxes you will be responsible for at the end of each year. Set your business up for success by planning ahead for your tax responsibility.
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