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Essential Tax Filing Tips for Small Business Owners
The freedom of running your own small business does not come without its fair share of responsibilities. This is especially true come tax time. When tax season rolls around, small business owners have to navigate a sea of financial jargon, ever-changing tax forms, and complicated requirements around reporting income and expenses.
Believe it or not, handling your business taxes doesn’t have to be a headache. Here are some of our best tips to make tax time easier in 2021 and beyond.
Reporting Payments to Non-Employees
Freelancers make up 35% of the workforce in the United States. With over 57 million Americans working as freelancers, business owners have a massive pool of talent to draw from. But paying those non-employees can complicate tax time. Make sure you send the right 1099 form to your contractors so you can report your payments properly!
As of 2020, you cannot use Form 1099-MISC to report payments to independent contractors and freelancers. Instead, you must use form 1099-NEC for reporting non-employee compensation. Determining what qualifies as non-employee compensation can be tricky, but it generally includes fees and commissions paid to an independent contractor amounting to at least $600 over the year. To make the 1099 filing process quicker and easier, consider using an e-file service to file your 1099s electronically this year!
Tax Deductions for Small Business Owners
You likely know that payroll and non-employee compensation is tax-deductible, but it’s easy to overlook many of the other tax deductions available to you. For example, many small business owners forget about the mileage deduction, which can amount to significant tax savings over the course of a year. You can even deduct educational expenses for things like books, training seminars, and online courses! As Skillcrush explains, qualified work-related education can include various forms of studies that improve or maintain your professional skills.
Do you run your business from home? You may be eligible for many more business deductions that can help offset the financial burden at tax time. For example, the home office deduction enables self-employed individuals and business owners to deduct a portion of their rent, utility bills, mortgage payments, and internet bills! The portion you can deduct will depend on how much of your home you use for business purposes.
Watch Out for Carryovers
Keep in mind that you may be able to carry forward some of your deductions and credits for future tax years. For example, if you can’t take full advantage of your home office deductions or charitable contributions one year, you may be able to use them as a carryforward. Capital losses can also be carried forward from previous years! This can help you reduce your taxes during the years when your business is more profitable.
Resolving Tax Issues
Misclassifying employees, underpaying taxes, and poor record-keeping can lead to harsh penalties issued by the IRS. Even if you take the time to do everything right, some tax issues may be unavoidable. Know what to do when you run into an issue so you can get it resolved quickly! For example, if you discover that you still owe taxes from previous years, it’s a good idea to work with a tax resolution company that can help you get everything cleared up. A great tax resolution company will help minimize the amount you owe, including interest and penalties.
How to Make Taxes Easier Next Year
Once you’ve made it through tax season, it can be tempting to put all that stress behind you and forget about taxes for a while. But planning ahead will make next year so much easier! Now is the time to establish an efficient expense tracking system so you won’t have to dig through receipts next year. Ditch those bulky spreadsheets and invest in accounting software—many modern accounting apps integrate seamlessly with payroll and inventory software to make your life even easier.
As Sensibull explains, it’s also important to keep your personal and business accounts separate. Nothing is worse than sorting through months of bank statements to organize your expenses at tax time. Separating your accounts now will make you—and your accountant—much happier when tax season rolls around again.
Doing taxes is just another unavoidable hassle that comes with running a business. But dealing with legal responsibilities and financial stressors like taxes is the price you pay for all of the wonderful benefits of owning your own company. After all, if running a business was easy, everyone would do it!
Striving for a better financial future? Columbus Financial & Success Coach can help you overcome the financial obstacles in your life. Call or text 614-282-3162 to schedule an appointment.
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