This post may contain affiliate links.Read my full disclosure policy here.
You know what’s crazy?
For all my love of numbers, I hate taxes. Just the thought of gathering all that paperwork, trying to mess with software, and crossing my fingers that I did everything right and won’t owe a cent, makes me break out into acold sweat — no joke!
As we’ve added a rental property in a different state, Joseph’s real estate gig, and my own blog-turned-business, the more complicated our taxes have become. I wish I could just hide under the covers until April 15, but Uncle Sam probably wouldn’t like that too much.
Despite every excuse known to mankind, I finally sat down and forced myself to doa ton of reading and research on all things small business and taxes this year, and while I am not a tax professional, I learned a lot. But rather than keep all this information to myself, I figured it might be helpful to share my findings with those of you who also work-from-home.
Becausewhether you own anEtsy shop, sell products through a direct sales company like Mary Kay or Pampered Chef, or even take on a few side jobsdecorating birthdaycakes for friends and friends of friends, you want to make sure your business is on the up-and-up, no matter how confusing the tax code might be. It’s not only ethical, it’s just smart!
Ihave tried very hard to break down and bring you themost importanttips, and will be updating this post as things change.So bookmark it, pin it, or tuck it away in your email to reference when you need it most. And brace yourself, because it’s a little on the long side — sorry!
1. Know How You Should File
There are a ton of filing or “classification” options to consider when you start a business.Are you a sole proprietorship? An LLC? A Corporation? There’s pros and cons to all of these, and we’re not going to cover all of them today, but here’s pretty much what you need to know:
- If your net income {after all expenses}, is $400 or above, thencongrats! You’re in business. Thebest option for you is to start as a sole proprietorship and file a Schedule C in addition to your personal taxes. Most small businesses start out this way, and it is theeasiest, and less painful route to go.
- If your net income is, or expected to be above $10,000, you may want to consider a single-member LLC. This separates your business assets from your personal so you are protected in case of a legal battle. You also file a Schedule C in addition to your personal taxes and you’ll have to pay self-employment taxes on top of everything else. This cost can get pretty hefty if you start making even more money.
- If your net income is, or expected to be $20,000 or above, you will probably want toclassifyyour LLC as an S-Corp. This requires a lot more paperwork, but you don’t pay self-employment taxes. Instead, you put yourself on the payroll, and only your wages are subject to employment tax.
There are, of course, a few more ways you can file, but for small business owners and freelancers, these 3 are the most common, and certainly less confusing!
2. Keep Good Records
Everyone always stresses that you need to keep a really detailed set of books when you own a business, but they don’t necessarily explain what you need to include. You do not, under any circ*mstances, want to hand your CPA a shoebox full of crinkled receipts or I can guarantee you’ll literally pay for it!
At the very least, you’ll want to keep track of income and expenses. I use a simple spreadsheet for this, but if you’d like something a little bit more structured, I would strongly suggest a software like Quickbooks, which integrates seamlessly with TurboTax.
I currently useQuickbooks Online and it is super super easy to use. The learning curve is practically nil for thecomputer-savvy, and the ability toimport all your transactions automatically is so handy!
In addition to some sort of record keeping system, it’s also good to keep track of all your paid invoices and expense receipts. Everything I am paid, orpay out, is printed, hole-punched and filed away in a 3-ring binder with an receipt or invoicenumber written across the top. Or, you can do everything digitally through Evernote.
3. Don’t Ignore Quarterly Taxes
Even if you don’t think you will make very much {or owe for that matter}, it is still very important to paytaxes on your income every quarter. Note: I did not do this for 2014, and as a result, faced a rather large bill when it came time to submit my taxes!
Most tax professionals suggest setting aside anywhere from 20-30% of your income to pay in taxes on form 1040-ES each quarter. However, if you file as an S-Corp, you would need to send in all payroll taxes and payments via Form 941—depending on how much you make, this could be every month or every quarter.
One mistake I made as an S-Corp was to ignore StateUnemployment Taxes. But you have to pay those too, and they get filed every quarter along with your 941. At the end of the year, the government will get their share on Form 940.
Ay yi yi….almost makes you NOT want to be in business, right? Don’t worry, you’ll get through this!
12/22/15 Update:If youfile as an S-Corp and also payhealth insurance out of your own business, you must add the total amount of yourannual premium to Line 2 on your Quarter Four941 along with the wages you earned. However, you do NOTneed to count that as taxable. The government just needs to see that you paid it so you can deduct it on your year end tax returns. I know that doesn’t sound like it makes a whole lot of sense, but according to my CPA, it’s the way the government wants your health insurance recorded from now on.
4. Don’t Forget about 1099’s
As your business grows, you may find yourself paying an assistant to help out, or you might have aone-time project that you need done for a set fee. This is called contract labor, andyou need to issue a 1099 (Miscellaneous Income) at the end of the year to everyone who you paid over $600. 1099’s are pretty easy to fill out, but they do require your helper to sign a W-9 with all relevant information.
As you receive money from various businesses, you will probably receive a 1099 as well. Report all of these on your tax forms {plus any other income} so as to eliminate any red flags. Every time a 1099 is filed on one end, the IRS looks for an expense on the other. They need to balance each other out, otherwise, you’ll have someone official poking around asking questions!
Note: 1099’s need to be issued and sent before January 31st.
5. Take Advantage of Deductions
Deductions are reallyjust another fancy term for expenses, and claiming them on your tax return will lower the amount of income you are taxed on, which means you will owe the government less money — win!
One of my favorite deductions is the mileage deduction. Many business owners (including me in the past!) discount this deduction because it seems too complicated to keep track of. But it’s actually really easy once you know what to do, especially if you take advantage of this easy to use mileage log.
For an exhaustive list of what you can deduct as a small business, I found A Freelancer’s Guide to Taxesreally helpful. This post takes you line-by-line through Schedule C so you actually understand whatexpenses to put where.
However, asomewhat grey area in the realm of deductions has to do with the “business use of your home.”Your Blogging Business: Tax Talk and Tips from a Bookkeeper Turned Bloggerby Nikki Hughes has the best explanation of this I’ve seen so far, and her book is a pretty good resource as a whole for everyone who owns asmall business, not just those in blogging. Definitely check it out!
6. Depreciate Your Equipment
Depreciationof equipment sounds like a term that only high paid CFO’s use, but even if you’re a small business owner, you probably use a laptop to connect with customers, a camera to take product photos, andoffice furniture to use and sit on while you’re doing your work.
The IRS allows you to depreciate all of these items over a period of time {usually 5-7 years} to help lesson your tax liability even further — meaning, that’s less you have to pay in taxes — another win!
You should use Form 4562 to calculate depreciation, butif you are unsure how to do it yourself,I would highly suggest you talk to a CPA about it to figure exactly what you can depreciate and by how much. The book I mentioned abovealso has a good overview of depreciation and how it works.
7. Don’t Be Afraid to Hire a CPA
Thisleads me to my last point — if taxes really make you break a sweat, it’s okay to hire a CPA. In fact, it’s recommended!
You don’t want to getyourself into trouble because of silly mistakes. Despite there being great softwareout there that can help guide you through the process, taxes are such a complicated mess. And because CPA’s know the tax code inside and out, they can help you file in such a way that benefits you.I’ve heard many a horror story about small business owners who try doing taxes themselves, and end up owing a lot more than they probably should have.
However, a CPA is not a crutch, and as a small business owner, you need to be awareof at least some of what goes into the tax filing process so you know exactly what to keep track of. This always makes it much easier for the CPA to do his job for you, which means less hours he’s working on your return, and the less you have to pay for it.
Whew — that was quite the post — but you made it!
Even though taxes are not necessarily a fun topic to discuss, ignoring them won’t make the situationgo away. It’s your responsibilityto doyour homework and understand your tax liability no matter how much you earn. Uncle Samwon’t be quite as forgiving if you don’t!
As I mentioned at the beginning of this post, I am not a tax professional, so everything I say here is not gold, so please do not take it as such! These aresimply the takeaways of what I have learned in the few years I’ve been doing business.
That being said, I am open to any and all questions about small business taxes you have in the comments, and if I don’t know the answer, I’ll find someone who will!
Do you own a small business?
How do you handle taxes?
– – – – –
Tired of forgetting important tax documents?
Disclosure: Some of the links in the post above are affiliate links. This means if you click on the link and purchase the item, I will receive an affiliate commission. Regardless, I only recommend products or services I use personally and believe will add value to my readers.Read my full disclosure policy here.
