Running your business can be a lot of fun when you’re designing products, decorating your storefront, or even setting up an online store. But it’s important to make sure you take the time to properly understand and pay your taxes. Otherwise, you could run into expensive fines or credit hits.
For example, the IRS will tack on a 5% charge to your taxes for every month that they are late. But let’s make sure your small business doesn’t go there this tax season. Here’s a quick breakdown of what you need to know about your small business’s taxes.
What will your small business pay taxes on?
There’s a lot to stay on top of when running and protecting your small business, including:
- Income taxes. These taxes are based on the amount of money your business earns each year.
- Estimated taxes. Your business will need to make estimated tax payments as you earn income throughout the year. These tax payments help pay your income tax and self-employment taxes. If you don’t pay enough for each of them, you’ll have to pay a penalty.
- Sales tax. Most states in the U.S. expect small businesses to collect sales tax from their customers. This means that, in some cases, you’ll be responsible for calculating and collecting the right sales tax amount. You’ll then need to submit it in your tax returns.
You’ll also be responsible for paying these taxes to your suppliers when you order inventory.
- Employment or payroll taxes. The amount you pay your employees determines this tax amount. You’ll then withhold this amount from your employees’ paychecks. This includes Medicare and Social Security taxes.
- Property tax. The amount of property tax your business pays is dependent on your type of property. It also depends on your city, county and state.
Consequences of missing tax payments
You probably know missing tax payments is bad, but do you know the actual consequences? Some of them include:
- Your credit takes a hit. Generally you’ll have to pay interest and penalties for not filing taxes. This is important to consider if you think you’ll need more financing in the future as you look to expand.
- You’ll owe debt. Over time this amount will keep growing and can become a burden to your business. Especially, if you have other loans to pay off.
- You won’t get a refund. The IRS isn’t going to send you money when you owe them money.
- The IRS can take certain assets. If you ignore your growing tax debt, the IRS may take your property and Social Security.
Tax Paying Tips for Small Business Owners
Some tips that make paying your taxes easier include:
- Using tax planning software. The most popular tax software is Turbo Tax. Programs like these are easy to use, allow you to receive your refunds faster and give you access to tax specialists.
- Track your spending throughout the year. You can use QuickBooks to track any opportunities for deductible expenses. Some common deductible expenses for businesses include:
- Contractors. If you hire freelancers or independent contractors, you may be able to deduct the costs of hiring them.
- Utilities. For instance, you may be able to deduct your electricity expenses for your business.
- Insurance. This can include the cost of your flood policy, cyber liability insurance or even malpractice coverage.
- Employee travel expenses. If your employees travel out of town frequently, you may be able to deduct expenses like lodging costs.
- Hire your spouse. For many businesses, hiring your spouse can help you lower your taxable income. It can also help you double your contributions to your retirement account.
- Hire an accountant. You should definitely hire an accountant if you’re going to be making deductions and looking for reimbursements. An accountant will know about any current laws that you can use to your advantage, or that could land you in trouble if you don’t handle them correctly.
Take the time to understand your taxes
It’s easy to get wrapped up in your products, taking care of your employees, store layout and even marketing efforts. But to be successful, you’ll need to make time to pay your taxes. Doing so will ensure your business’ success for years to come and help you avoid costly penalties.