It’s no doubt that becoming self-employed is the path more people are thinking of taking as there is uncertainty in the economy. Starting a business is the way to go when seeking to make some extra cash.
You indirectly pay taxes when you are employed by someone else’s business. The social security and medicare taxes are divided between you and your employer. You pay less than 8% of your gross income in taxes while your employer completes that contribution.
Now, since you no longer have an employer, you become responsible for the 15.3% tax. This time around the tax is split with 12.4% going for Social Security and the rest for Medicare.
As business owners, whether freelancers or corporation owners, you are responsible for obeying the law concerning taxes with respect to the kind of business you run. We’ve put together some tips on how to manage your taxes.
1. Keep Records And Separate Business From Personal Expenses
It is important that you keep detailed and accurate records of your business during the year to ensure your tax return is precise. Without adequate record-keeping, you could be putting you and your business at risk of an audit. Considering we’re in a digital age, it is recommended that your business uses at least a basic version of verified and trusted accounting software. Ensure that is easy to use, budget-friendly and can help you keep a record of all your entries or expenses.
Also, you need to separate your personal expenses from the business. It can be tempting to mix them up but if the IRS should audit your business and discovers the expenses are intertwined, they could start looking into your personal expenses even if the business expenses were correctly recorded. Open a separate bank account and credit card to run your business and only use those accounts. Make sure and use trusted accounting software.
2. Hire the Right Accountant
You can’t possibly handle all aspects of the business yourself; hire an accountant, so you can be sure that tax filings and payments are done properly. Getting accountants would help reduce the amount of time you’d spend on bookings and taxes. An accountant’s role is to estimate tax payments, asset depreciation, and calculate your self-employment tax. Think of them as investment and constructive partners that are crucial to the success of your business.
The right accountant would work with you to keep track of your income and expenses; ensuring that you don’t have any issues with cash flow. They also get to oversee your gross and net profits. If you’re just a new business owner, do start working with your accountant from the early stage of your business and not just when it’s tax season. Accounting is very important for the growth of your business.
3. Determine Tax Liability
After getting an accountant, the next thing to talk about would be how to determine your tax liability. It is going to serve as a guide on how you file and pay your taxes. Business tax liability is unique and primarily known by four factors:
- Business structure
- Employees count
How your business is structured would determine what type of federal income tax your business needs to file. Keep in mind that different states and communities request that businesses file various tax types. Furthermore, the number of your business asset and type which include stock, equipment, and property directly impacts the business’s overall tax liability. Business owners with employees would need to file taxes for their workers, while self-employed business owners will just need to file self-employment tax.
4. Plan Ahead To Prevent Mistakes
Yes, your accountant should handle everything tax and let you concentrate on the business. However, with some planning, you would be able to avoid some errors. As a small business, for instance, paying estimated taxes is compulsory. How do you keep up and ensure you’re ready before the due date? Mark your calendar ahead of time each year for when you’d pay the four quarterly taxes. Do this alongside keep records of your transactions.
Running a business can be risky at times, and you need to be prepared for anything. Stash some funds away in case of any unexpected event or costs. Apart from that emergency money, always keep money aside for tax purposes. It is better to be safe than sorry.
When starting a new business, the pressure you face can seem insurmountable, but don’t panic. There is always help if you know where to look. If you can afford it, help from a professional tax adviser would set you on the right path and if you don’t, you just might have to do some in-depth study.