Minimizing Your Tax Bill For Tax Season
Tax season (dun, dun, dun - insert dramatic music here) is stressful. Regardless of your background, transiting to being a small business owner can be daunting. Employees get paychecks with tax withholdings. Depending on how you fill out you W-4, your employer may withhold more tax than needed in which case you get a tax refund when you file. This isn’t how it works in entrepreneur land. We are responsible for setting aside our own money for taxes. If we don’t plan and prepare during the year, we may be left with a huge tax bill when we file our taxes. When that happens, taxpayers can get on an installment plan to play catch up, but then they still need to be setting aside income for the next years taxes. It’s difficult to get up to date. With some proper planning, we can avoid this and save stress and dollars.
MAXIMIZE YOUR DEDUCTIONS
The IRS allows small business owners to deduct “ordinary and necessary” business expenses. We could chat for a while about what is ordinary and necessary, but the short cut is considering what is standard and reasonable for someone in your industry. If want more info on small business tax deductions, grab a copy of my small biz tax deduction guide.
Part of maximizing your deductions is tracking them. You must account for deductible expenses in order to know how much you spent on your business during the year. Make sure that you are using proper banking system, doing basic bookkeeping, and tracking your expenses with receipts and invoices.
PAY YOUR QUARTERLY TAXES
The goal is set aside as close to the exact amount of funds, as possible, to pay estimated (quarterly) taxes, such that you will not be penalized by the IRS or owe any tax when you file your tax return. How do you or a tax professional do this? Essentially, estimating taxes requires an estimation of total tax due.
To do that, you must project your income and expenses for the year. Once you do that, a tax professional can estimate your year-end tax owed. They divide that figure by four, thereby providing your estimated quarterly tax. If estimated tax for 2017 is $20,000, you should pay $5,000 each quarter in taxes.
Note that the IRS has safe-harbors for penalties. In some circumstances, you may not be required to pay quarterly taxes. However, I find that it’s best practice to pay quarterlies regardless.
If you use a program like Quickbooks, it will estimate your quarterly tax due for you. I wouldn’t rely on these figures 100% of the time, but they are a good starting point. If you work with me for bookkeeping services, I will make your quarterly estimates for you. Want to try out Quickbooks? I’m affiliate. You can use my link for 50% off for three months.
Tips for saving for quarterly taxes
I recommend opening a business savings account along with your business checking account to stash away cash for your quarterly taxes.
Still need to open you biz bank account? Here’s the info you need before you go to the back.
PLAN AHEAD AND STRUCTURE YOUR BIZ
What many people don’t realize is that structuring your biz as an LLC has no tax benefit. You form an LLC for liability protection. I definitely recommend an LLC for liability reasons. Once you get to a certain stage in your biz, you can consider taking an “s election” for your LLC to be taxed as an S corp. These entities warrant their own blog post, but don’t you worry, I have already written them.
If you want to save dollars and avoid a large tax bill, you need to:
(1) Plan your business entity and structure and it’s tax advantages;
(2) Properly save money for taxes and pay them on a quarterly basis; and
(3) Account for and maximize deductions.