Taxes for Entrepreneurs: What You Need to Know
Most entrepreneurs clinch at the sound of the word “taxes.” And it’s not simply out of any fear of paying large sums of money to Uncle Sam. It’s more because of the complexity – the multiple layers and branches of compliance associated with taxes. This is not true for everyone, but there might be some who would rather pay a little more in taxes in exchange for some relief from the burden of the paperwork, research, and unknown final results of filing tax reports.
But entrepreneurs need to come to grips with the fact that taxes are an inevitable part of being in business.
The best antidote for the fear and dread associated with taxes is preparation.
Planning, knowledge, and information help to reduce the anxiety about dealing with the IRS. Finding out as much as you need to need to know about taxes to be prepared can make the process much easier.
Of course, no one will ever know everything about taxes – industry trends, compliance issues, and even simple changes in government all lead to regular changes in the tax code. But knowing some basics about your tax situation and knowing where to turn to when your situation changes can help you confront the fear of what will happen if you receive bad news from the IRS.
Entrepreneurs can confront their fears and address their tax obligations through planning and preparation. Here are the basic steps every entrepreneur should consider:
1. Know the Rules for Your Type of Business
Different kinds of businesses require different kinds of tax filing and are subject to different rules. The rules are not the same for an independent contractor as they are for an S corporation or a C corporation – or any other business entity. Work with your tax professional to understand what’s required for your form of business.
2. Know the Rules for Your State(s) and Your Industry
The starting point of most tax filing is the federal income tax return. However, many deductions and credits are industry- or state-specific. Know the specific forms and rules applicable to the states where you have to file. For example, if your company has operations in the state of California or is incorporated in Delaware, it may need to file annual tax reports independent of the annual income tax returns required by the IRS and other states.
You should also know the requirements and deductions specific to your industry. For example, if your company is developing a new technology or process, it may qualify for a research and development (R&D) credit, for example.
3. Entrepreneurs Should Choose States Wisely
If every state could get a piece of the pie, it would. Every state where you do business will try to collect taxes from you. Every state where you do business will try to collect taxes from you. And the determination of where you do business is not always clear-cut. But once a professional assessment is made of what constitutes “doing business” in each state, you can try to position your operations in states that are more tax-friendly – or in those that provide the most incentives, such as job creation credits and research and development credits.
4. Pay Attention to Timing
Business owners like their customers to pay them in a timely fashion. Well, you and your company are the IRS’s customers. What to do think the IRS expects from you when it comes to tax payments? Timeliness. Entrepreneurs often forget to pay estimated taxes during the year, especially during their first year in business. Most taxpayers focus on the year-end tax returns. In doing so, they forget that both the IRS and individual states require quarterly estimated tax payments where taxable income exists. Know what is due, to whom, and when.
5. Taxes Can Provide Opportunities
When it comes to tax-saving opportunities, there are no better tax benefits than those that help your bottom line while also enhancing employee morale.
This can be accomplished by implementing employee benefits that are tax-friendly and that add value to your employees’ finances or career. For example, adopting a retirement plan for your employees will help them start saving for retirement at an early age.
Another often overlooked employee benefit is education programs. With the increased need for constant learning, employees truly value employer benefits that include incentives for continuing education. While these programs are expenses for the company, they are also deductible expenses that bring a potential added benefit: loyal employees.
6. Don’t Forget Sales Tax!
Sales tax can be a huge penalties hole for entrepreneurs. Don’t start creating a presence in a state and selling your products without ensuring that you’re in compliance with that state’s sales tax requirements. Find out what they are early on to avoid problems later.
7. Payroll Taxes
While payroll taxes are another biggie, they’re also easily outsourced. Many entrepreneurs outsource them to professional payroll providers whose services include the proper withholding and remittance of payroll taxes. This will not only make life simpler for you but it will also ensure your taxes are done right the first time.
8. Establish a Sound Record-Keeping Process
When it comes to documentation and retention of receipts and invoices, there’s no such thing as overdoing it. Every deduction or credit that you take can be challenged by the IRS or a state during an audit. If you have the supporting documentation and can prove that the deductions were business-related, there’s a good chance that you’ll prevail.
As scary as taxes may sound, many others have been in your shoes before you. Learn from their mistakes and successes. Arm yourself with information – and with the support of tax professionals whenever appropriate. Once you understand the requirements and go through one or two tax-filing cycles, the process becomes a routine part of your life as an entrepreneur.
Taxes can be daunting for entrepreneurs but learning the basics to get you through your first year can remove any fear and ensure you’re setting your business up correctly.