Entrepreneurs are famous for working hard for success, but sometimes they make mistakes when it comes to paying income taxes. Below are some tips to help the budding entrepreneur before tax season rolls around.
- Don’t Combine Personal And Business Expenses
It should be common knowledge that as a sole proprietor of your business you need to keep your business and personal costs separate, but many first time entrepreneurs fail to realize this fact until it is pointed out by a tax professional. By that point, it can require many hours of work for the CPA to untangle your financial records and this can be very expensive. From the beginning, every entrepreneur should open separate checking and saving accounts for their business, as well as company credit cards. That way all expenses incurred by your business can be easily identified and calculated by your tax professional.
- Set Up Payments For Quarterly Taxes
By not paying quarterly tax payments an entrepreneur can be penalized with a significant amount of interest, so it is important you pay these taxes in a timely manner. Because tax laws change quite frequently over time, it’s a good idea to ask a tax professional to figure out the amount you should pay each quarter. Included in these quarterly payments are federal and state income tax (where applicable), Social Security tax, and Medicare tax. You will need a special form to fill out and submit when paying your company’s quarterly taxes. This is IRS Form 1040-ES-Estimated Tax for Individuals.
You can check out relevant information on the IRS website or speak with a tax professional.
- Hire a Professional
As an entrepreneur, you may be tempted to go ahead and calculate your taxes by yourself. Unless you have extensive experience in this area, however, it might not be a very good idea. Not only will a seasoned tax professional save you a lot of time and energy that could otherwise be devoted to your business, but they can also save you money as well. With a professional, you don’t need to know all the convoluted tax rules and regulations. An experienced CPA can spot an entrepreneur’s mistakes, maximize deductions, and formulate financial strategies to help you save money on your tax return.
If you are the disorganized type, it might be a good idea to hire a professional accountant to manage and organize your financial records throughout the year as well as a CPA for tax returns. Then when tax time rolls around you will be in good shape when you turn your company’s records over to the CPA to calculate your income tax.
- Choose the Right Corporation For Your Business
While forming a corporation may provide some tax breaks for the entrepreneur, the wrong type of corporation can create a higher tax bill. For example, a business owner that operates under a C corporation could possibly have to pay taxes twice. The entrepreneur is required to pay the taxes on his business’s profits and again on an individual tax return.
It’s a good idea to seek the advice of an experienced tax professional when forming a corporation to discuss the advantages and disadvantages of the different types of corporations.