Small business owners frequently look for ways to reduce their company’s tax liability. Consider whether the six strategies listed below can assist you as you work with your tax advisor. First, let’s look at how taxes affect your business.
How Taxes Impact Your Business
Every person that owns a small business in the United States is obligated to pay taxes. While the exact amount differs by state and business structure, tax payments are one of the most expensive aspects of running a small business.
A typical small business pays a tax rate of 19.8% on its earnings; therefore, taxes are the most significant business expense. Small business owners who file their taxes late, incorrectly, or not at all risk fines or even criminal prosecution.
However, small-business taxes aren’t as complicated as you think, and you can easily understand the world of taxes. You can legally reduce your tax liability with the help of a certified public accountant (CPA) so that you are not left with a large tax bill at year’s end.
Tax Management Tips for Small Businesses
Here are six tax-saving tips to help you tackle your small business taxes.
1. Create a plan for paying taxes
The sooner you know your company’s general outlook for the tax year, the better prepared you will be to avoid cash flow disruptions — either by setting aside money or securing a line of credit in order to pay the IRS.
If you qualify, consider the following options: Estimated taxes are frequently based on the previous year, so if you had a bad year, you could pay a low estimated tax this year to sustain cash flow. You can collaborate with your accountant to estimate the amount of tax due so you can be better prepared for the inevitable payment.
2. Set up a limited company
Setting up a limited company is one of the best ways to receive tax-efficient payments. With a limited company setup, you get to
- Define your brand;
- Own everything you do;
- Run your business in the most tax-efficient way;
- Pitch for work you couldn’t get as a sole trader.
3. Look into small business tax deductions
Reap the benefits of a long list of deductions that can reduce your tax bill. This strategy represents one of the most crucial small business tax tips. Tax deductions reduce the total income subject to federal and state taxation. There are plenty of tax deductions for which you may be eligible; the real difficulty is deciding which ones.
Marketing costs, rent, travel expenses, and many other charges can all be written off or deducted when filing taxes. However, each deduction has its own set of eligibility requirements. List the specific deductions on your tax return to maximize your tax deductions.
4. Search into small business tax credits
Tax credits are the closest thing to free money you’ll find. Tax credits aid you in reducing your small business tax bill because they provide dollar-for-dollar reductions in your tax liability.
You may be eligible to receive a tax credit when you provide subsidized health coverage or a retirement plan to your employees. Pass-through entity owners (sole proprietorships, partnerships, limited liability companies, and S corporations) can use personal tax credits to reduce their business income tax liability.
5. Maintain your quarterly tax payments
Anyone who files a federal income tax return and expects to owe more than $1,000 must make quarterly estimated tax payments. You’ve probably been paying quarterly taxes for a long time but didn’t realize it.
If your employer submitted Form W-4, they automatically estimated your quarterly taxable income for you and deducted them from your paychecks. You must evaluate and make those payments now that you have your own small business.
6. Learn about money transfers and taxes
Understanding the fundamentals of international money-transfer laws is critical if you are transferring money abroad as a small business. If the transaction exceeds $10,000, you must report your transaction to the Internal Revenue Service (IRS). Failure to do so may result in fines as well as other legal consequences.
In addition to considering our small-business tax tips, keep in mind that you should seek advice from an accounting professional. Regular meetings with an accountant will help you improve your bookkeeping practices. Those regular meetings will also improve your understanding of the financial workings of your small business, in addition to managing the nuts and bolts of tax preparation.
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