Small Business Taxes For Dummies - Eric Tyson

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do this because you have deadlines and don’t want contact initiated by local or state authorities or the IRS to result in fines, penalties, or worse, jail time!

      Nothing really forces you to plan ahead regarding your tax situation and small business. That’s why the vast majority of small-business owners don’t take steps year-round to plan and reduce their taxes. However, tax planning all year is valuable because it enables you to stay on top of your tax and business financial situation and minimize the taxes you legally owe. In this section, I explain typical ways in which taxes enter small-business decisions and some common tax mistakes folks make in this realm.

      Factoring taxes into small business decisions

      

Taxes infiltrate many areas of your small business and your personal finances. Some people make important financial decisions without considering taxes (and other important variables). Conversely, in an obsession to minimize or avoid taxes, other people make decisions that are counterproductive to achieving their long-term business and personal financial goals. Although taxes are an important component to factor into your major business and financial decisions, taxes shouldn’t drive or dictate the decisions you make.

       Type of business and benefits offered: The type of business entity you select for your business — sole proprietorship, limited liability company (LLC), S corporation, and so on — can have significant tax and other consequences. The benefits you’re able to utilize and offer to your employees, if you have them, also have tax ramifications (see Chapter 2).

       Retirement accounts: Taking advantage of retirement accounts can mean tens, perhaps even hundreds, of thousands more dollars in your pocket come retirement time. Offering retirement account access to your employees can also be a valuable employee benefit for recruiting and retaining good employees if they understand what they have. Refer to Chapter 3 for more on retirement accounts.

       Spending: Throughout this book, I discuss myriad spending decisions you may face in your small business, such as buying equipment (Chapter 8), spending on employee benefits (Chapter 2), and so on. These decisions will often affect your taxes both now and in the future.

       Protecting your assets: Some of your insurance decisions also affect the taxes you pay. You’d think that after a lifetime of tax payments, your heirs would be left alone when you pass on to the great beyond — but that’s wishful thinking. Estate planning can reduce the taxes that are siphoned off from your estate. See Chapter 5 to find out more about estate planning.

       Tracking your business financials: Throughout the year, you should stay on top of your business’s income and expenses so that you can see your business’s financial health and record the numbers you need come tax time. Chapter 6 covers these important issues.

      Checking out common tax mistakes

      Even if some parts of the tax system are hopelessly and unreasonably complicated, there’s no reason why you can’t learn from the mistakes of others to save yourself some money, no matter the time of year. With this goal in mind, this section details common tax blunders that people make when it comes to managing their money.

      Seeking advice after an important decision

      Too many people seek out information and hire help after making a decision, even though seeking preventive help ahead of time generally is wiser and more financially beneficial.

Before making major small business and financial decisions, educate yourself. This book can help answer many of your questions. You may also want to do further research on your own (see Chapter 12) and/or hire a tax advisor (refer to Chapter 13) for some advice before making your decision(s).

      Failing to withhold or submit enough taxes

      If you’re self-employed (or earn significant taxable income from investments outside retirement accounts), you need to make estimated quarterly tax payments. You also need to withhold taxes for your employees and send those taxes along to the appropriate tax agencies. Some small-business owners don’t have a human resources department to withhold taxes and dig themselves into a perpetual tax hole by failing to submit estimated quarterly tax payments.

      To make quarterly tax payments, complete IRS Form 1040-ES, “Estimated Tax for Individuals.” This form (discussed in Chapter 10) and its accompanying instructions (and payment coupons) explain how to calculate quarterly tax payments. You can submit payments by mail or electronically through creating/using an online account on the IRS website (https://www.irs.gov/). For more information on the requirement for employee tax withholding, see Chapter 6.

      Missing legal deductions

      

Some taxpayers miss out on legitimate tax write-offs because they just don’t know about them. If you aren’t going to take the time to discover the legal deductions that are available to you and that I discuss throughout this book, then you should pay for the cost of a competent tax advisor at least once. Fearing an audit, some taxpayers (and even some tax preparers) avoid taking deductions that they have every right to take. Unless you have something to hide, such behavior is foolish and costly. Note that a certain number of returns are randomly audited every year, so even when you don’t take every allowable deduction, you may nevertheless get audited! And, if you read Chapter 11, you can find out how to deal with an audit like a pro.

      Forsaking retirement accounts

      All the tax deductions and tax deferrals that come with accounts such as 401(k)s, SEP-IRA plans, and individual retirement accounts (IRAs) were put in the tax code to encourage you to save for retirement. That’s something that you as a small-business owner should be doing for yourself as well as encouraging your employees to do.

      Not owning real estate

      In the long run, owning a home should cost you less than renting. And because mortgage interest (on up to $750,000 of mortgage debt) and property taxes (up to $10,000 when combined with your state income tax payments) are deductible, the government, in effect, subsidizes the cost of homeownership. (Stay tuned as the state and local tax limit — aka SALT — may be increased higher than $10,000 in 2022.)

      If

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