Business owners often search for ways to reduce their companies’ tax liabilities, constantly trying to manage the taxes they have to pay. And with the tax deadline fast approaching, these owners need to understand that tax management is a vital aspect of running their businesses. That said, your ability to manage your taxes typically depends on your business’s location, its legal structure, and, surprisingly, the employees. Generally, if you have employees, you’ll have to pay federal and state employment taxes, including unemployment insurance and workers’ compensation.
Not to mention, you’ll also have to pay both deferral and state taxes on your business income. In addition, your state and federal governments might require other taxes as well, but that depends on your business’s nature.
Therefore, whether you have been operating a business for a few years or you’re the new startup on the block, you’ll be quickly overwhelmed. You’ll have to track everything from your expenditure to business income to everything in between. Luckily, business owners can follow a few tried and tested tax management tips to make this process smooth. So, without further ado, some of these tax management tips are listed down below;
Hire a competent tax professional
Tax professionals such as tax attorneys and tax accountants do more than filing your business taxes or preparing financial statements. These professionals work with you the entire year-round to track your business spending and income, ensuring that you don’t run into cash flow issues. They also monitor your net and gross profits while suggesting ways to minimize tax liabilities and increasing overall profits.
A tax accountant or tax attorney is vital to your business’s long-term survival and success. So, consider hiring a competent tax professional if you want to file your taxes, be it federal sales tax or employment tax, more accurately and on time.
Keep your business and personal expenses separate
The best thing you can do for your business is keeping your business and personal expenses separate. Such a thing will allow you to stay away from the IRS and any tax issues in the future. Suppose the IRS performs an audit on your business for some reason. And they get a hold of your personal and business expenses; they might start digging into your personal accounts.
So, it is wise to open up two different bank accounts—one for your business and one for your personal expenses. Furthermore, if you’re using credit cards to pay for day-to-day business expenses, ensure you’re using a business credit card instead of a personal one.
Recording everything from business expenses to income to everything in between will ensure that you file your business taxes accurately when tax season comes around. If you fail to do so, you might not be able to take advantage of tax deductions. Or worse, you might end up getting audited by the IRS.
That said, you can invest in record-keeping or accounting software to manage and track every business expense. Such a thing is a low-cost investment considering the number of headaches it will allow you to avoid in the long run.
Know the difference between gross and net income
Suppose you’re charging customers less money than it takes to manufacture a particular product. In that case, you’ll end up losing money no matter how many products you sell. Unfortunately, these days, most small business owners don’t know the difference between gross and net income and how it affects their tax payments.
For example, if a product costs 200 dollars to manufacture and sells for 300 dollars, your gross income will be 100 dollars. However, your net income might drop to 50 dollars after deducting expenses. So, you must understand the difference between gross and net income if you want to file your taxes more accurately. If you don’t, then be ready to be audited by the IRS, even if you didn’t mean for it to happen in the first place.
Manage your payroll properly
Payroll is an integral part of any business, especially if you want to file employment taxes properly. So, if you’re looking to save money on payroll, consider outsourcing your payroll to a reputable payroll management company.
Most business owners often cut corners and try to save money by hiring a lesser-known payroll management company. Only to find that the company they hired wasn’t remitting payroll taxes. Considering that the IRS checks your business’s payroll taxes every quarter, you might get into big trouble if the company you hired isn’t paying payroll taxes.
Classify your business accurately
According to various tax professionals, if you fail to determine your business’s legal structure accurately, you might end up paying more taxes than you should. Generally, there are four types of legal business structures- sole proprietorship, LLC (limited liability company), partnership, and C-corporation.
Every legal business structure has varying tax requirements and liabilities. Therefore, you must consult with your tax accountant or tax attorney before choosing the legal design for your business. You can also search online to know more about the different types of business structures available these days.
Contribute to charity
Giving money to charity will make your business more socially responsible in society’s eyes and engage your employees in meaningful activities in the process. However, most importantly, it will allow you to take advantage of tax deductions. That said, if you own a pass-through business, your ability to receive tax deductions on charitable gifts might be limited. Again, it is because of the Tax Cuts and Jobs Act’s guidelines.
So, it is wise to review your donation strategy with your tax specialist before you donate money to charity.
Take advantage of equipment deductions
If you purchase used or new equipment for your business and place it in service before the year ends, expect federal deductions up to 1 million dollars. Moreover, companies can also apply for a hundred percent depreciation deduction bonus on specific equipment types.
In addition, this type of tax deduction applies to both new and used equipment. So, if you’re looking to save a lot of money on your taxes, claiming deductions on business equipment is an easy way to do so.
Managing your company’s taxes can be an intimidating process, especially if you’re new to the business world. However, it’s wise to approach your write-offs more sensibly. Track and record every business expense, budget correctly, and elicit advice from a tax specialist to be prepared and confident when tax season arrives.
In no time, business tax management will become a cakewalk for you, eliminating all the worries.
Read More: How to Tell If You’re Overpaying Taxes?