Here are a few tax tips for small businesses to keep in mind to save money on their taxes.
Be punctual i.e. pay what you owe, when you owe it.
File all your returns and pay all your taxes on time. In this way, you can avoid expensive late filing payment penalties and interest. It is important to be punctual when paying your taxes especially for small businesses where cash flow is limited. There is no escaping the IRS, who will catch up with you and when that happens, you will have to pay not only the taxes you missed, but penalty fees as well.
Be proactive about your tax planning and develop a tax planning mindset.
Most people only worry about their taxes during tax season. However what they fail to realize is that by planning your taxes all year round you can save yourself the hassle and headache of doing your taxes at the last moment. Develop a tax paying mindset and try to defer income, pay bills early, buy supplies and equipment in bulk and invest in a retirement plan. Be proactive about your taxes, don't be afraid of it.
Document your expenses and keep financial records up-to-date.
It is important that you document your expenses well, so that if your business is ever audited you have proof of your expenses. Keep a mileage log for your car when you use it on business trips and keep receipts for entertainment expenses and business dinners. By keeping your company's financial records organized and up-to-date, it will make your life a whole lot easier when tax season begins. More importantly, it also lessens the chance that you will miss out legitimate expenses as you have lost receipts. Remember the golden rule of taxes that every dollar of documented means one less dollar of taxable income.
Hire a professional to do your tax returns.
Many small businesses think that they can prepare their taxes by themselves and save money by not paying a professional to do it. However this is a huge mistake. Professional tax prepares specialize in not only helping a small businesses minimize their tax liability but also help them save money in the end. It is very hard for a small business owner to be aware of the ever-changing rules and regulations of the IRS; by hiring a professional taxation expert you can avoid any tax hassles and feel confident when filing your tax returns. Remember to work with a tax professional who is an expert rather than a piece of tax software. You can also save money by working with an income tax preparation service that offers free electronic filing for both federal and state returns.
Remember to relax.
Most people get very agitated when it comes time to pay their taxes. What they need to realize is that worrying will not get them anywhere. Relax; the IRS is often willing to work with you to set up a tax payment plan, so that you can pay your taxes with ease. Yes it may cost you a bit more as you have to pay interest, but it is much better than paying a hefty penalty fee.
Incorporate yourself.
If you are a proprietor or partner in a business, it is time to get yourself incorporated. Doing this means that you will not only limit your liability, but you can also enjoy lower tax rates on a small business income and other tax advantages as well.
Be home based.
If you are a small business try to become home based firm. This will not only keep your overhead expenses low, but you will be able to write-off the business use of your home when filing your taxes.
Split your income.
You can split your income by hiring your family members as your employees and paying them reasonable wages. This way you can legally divert the income taxed at your higher rate to your family members such as your spouses or children that are in a lower tax bracket. Additionally spouse employees may also be eligible for fully deductible health insurance.
Remember to separate your personal and business expenses.
It is important you separate your business and personal expenses especially if you are running your small business from your home. This makes sorting finances at tax time much easier and helps legitimize your business.
Independent contractors.
Many small businesses utilize the services of independent contractors; however do not forget to file annual information returns to both your contractors and to the IRS, so that everyone is aware of what is going on. Also remember to clearly define the job specifications of the independent contractors involved such as graphic artists, painter, etc.
