5 Things Entrepreneurs Should Do Post Tax Filing to Prepare For Next Year
Comprehending the intricate details of tax laws and regulations is essential for small business owners to maximize their earnings. This blog post will provide small business owners with the most tax tips to help them make sense of the complexities of taxation and maximize their profits. Don’t let tax season sneak up on you again. Start preparing today!
Keep Track of Your Hiring: W-2 Employees vs 1099 Subcontractors
As a small business owner, one of the most important decisions you’ll make is whether to hire W-2 employees or 1099 subcontractors. Understanding the differences between these two types of workers and their tax implications can help you make an informed decision that best suits your business needs.
W-2 Employees: These are individuals who work directly for your company on a regular basis, typically following set schedules and receiving employee benefits such as health insurance, paid time off, and retirement plans. As an employer, you must withhold income taxes from their paychecks and also contribute to Social Security (FICA) on their behalf.
1099 Subcontractors: Also known as independent contractors or freelancers, these professionals provide services to your business but operate independently without being considered full-time employees. They handle their own tax obligations by reporting earnings through Form 1099-MISC, meaning they’re responsible for paying self-employment taxes in addition to federal income taxes.
The Advantages of Hiring W-2 Employees
- Better control over work quality: Since they follow company guidelines more closely than subcontractors do, it’s easier to ensure consistent performance from employees.
- Potential long-term commitment: Full-time staff members are often more invested in the success of your business because they rely on it for steady employment.
- Easier collaboration: In-house team members can communicate with each other more effectively due to shared goals and familiarity with internal processes.
The Advantages of Hiring 1099 Subcontractors
- Lower costs: Since you don’t have to provide benefits or pay employer taxes for subcontractors, they can be a more cost-effective option.
- Flexibility: You can bring in specialized talent on an as-needed basis without committing to long-term employment contracts.
- No need for additional office space: Many independent contractors work remotely, saving you the expense and hassle of providing physical workspace.
Weigh up the cost, extent of job, and control you require when deciding which worker is ideal for your company. If your goal is to reduce your overall tax burden, you may consider hiring more 1099 workers. However, if your job requires hands-on training and in-person work, you’ll get a better value for the price by hiring W-2 employees.
Separate Your Business & Personal Accounts
Maintaining separate accounts for personal and business finances is essential for small business owners, as it facilitates bookkeeping and makes tax season easier. Organizing your personal and business finances in distinct accounts makes it simpler to manage the books and facilitates tax filing, enabling you to more effectively compute deductions while avoiding potential problems with the IRS.
The benefits of separate accounts include:
- Better organization: Separating your personal and business expenses allows you to track your income and expenses more accurately, which can be crucial when preparing financial statements or applying for loans.
- Tax compliance: Mixing personal and business transactions may raise red flags with the IRS, leading to audits or penalties. Keeping separate accounts reduces this risk while ensuring that all deductible expenses are properly documented.
- Easier budgeting: With distinct accounts for each aspect of your life, creating budgets tailored specifically towards personal or professional goals becomes simpler.
Start Tracking Your Deductions Now
Maintaining a record of deductions throughout the year is essential for small business owners to reduce their tax liability and potentially save thousands on taxes. By doing so, you can significantly reduce your tax liability and potentially save thousands on your taxes.
Small businesses can benefit from numerous tax deductions to reduce their taxable income. Some common deductions include:
- Home office expenses: If you use a portion of your home exclusively for conducting business activities, you may be eligible for a home office deduction.
- Mileage and vehicle expenses: You can deduct costs related to using a personal or company-owned vehicle for business purposes using either the standard mileage rate or actual expenses method.
- Bonus depreciation: Under current IRS rules, qualifying property purchased by small businesses may be eligible for an immediate deduction through bonus depreciation rather than being depreciated over time.
- Salaried employee wages and benefits: The cost of paying employees’ salaries as well as providing health insurance coverage are deductible expenses.
To make tracking these deductions easier during tax season, it’s essential to keep accurate records throughout the year. Here are some tips on organizing receipts and expense records efficiently:
- Create separate folders (physical or digital) for each category of deductible expense such as advertising costs, office supplies, and travel expenses.
- Scan or take photos of physical receipts to store them digitally. Many accounting software programs offer mobile apps that allow you to snap a picture of your receipt and upload it directly into the system.
- Regularly update your expense records by entering transactions as they occur. This will help prevent any last-minute scrambling during tax season.
Create a Deductible Retirement Savings Plans
By taking advantage of deductible retirement savings plans, small business owners can enjoy significant tax benefits while also securing their financial future. These plans provide significant tax benefits and help you save for your future financial security. Different retirement plans exist, each with its own regulations and contribution maximums.
Individual Retirement Accounts (IRAs)
Traditional and Roth IRAs are popular options for self-employed individuals or those who own a small business without employees. Contributions to a traditional IRA may be tax-deductible, while withdrawals in retirement are taxed as ordinary income. Contributions to a Roth IRA are made with post-tax income, and withdrawals in retirement can be free from taxation.
Simplified Employee Pension (SEP) IRA
A Simplified Employee Pension (SEP) IRA is an excellent choice for small businesses that want to offer their employees a straightforward and low-cost retirement plan option. Employers can deduct up to 25% of an employee’s compensation or $58,000 per year (whichever is less) from their taxable income as a contribution towards the employee’s retirement account.
Savings Incentive Match Plan for Employees (SIMPLE) IRA
The Savings Incentive Match Plan for Employees (SIMPLE) IRA allows both employers and employees to make contributions towards the employee’s retirement account on a pre-tax basis. This type of plan works well for smaller companies looking to establish an employee retirement plan with minimal administrative costs and responsibilities.
A 401(k) plan is a popular option for larger small businesses, as it allows employees to make pre-tax contributions through payroll deductions, while employers can also contribute by matching employee contributions or making non-elective contributions. These plans often come with higher administrative costs but offer more flexibility in terms of investment options and loan provisions.
To maximize the tax benefits of your chosen retirement savings plan, be sure to keep track of contribution limits and deadlines throughout the year. A financial advisor or tax specialist can be consulted to decide which plan is most suitable for your business objectives.
Estimate Your Profits
Estimating your profits throughout the year is crucial for small business owners, as it helps you plan accordingly for paying taxes and making informed financial decisions. Take a successful luxury real estate investor, for example. Regularly monitoring income and expenses would help them report losses, which can offset their overall liability.
To accurately estimate your profits, make sure to monitor your income and expenses on a regular basis. Keeping an eye on all sources of income (e.g., sales or services) and any outgoings connected to your business operations (like rent, utilities, supplies), is essential for accurately predicting profits. Consider utilizing accounting software or employing an accountant to facilitate this process more effectively.
Gross profit margin is a key indicator that shows how profitable your business is after considering its direct costs such as materials used in production or cost of goods sold (COGS). To calculate gross profit margin:
- Determine total revenue by adding up all sales during a specific period.
- Subtract COGS from total revenue to find gross profit.
- Divide gross profit by total revenue then multiply by 100% to get the percentage value of gross profit margin.
This calculation gives you an idea about whether there’s room for improvement in terms of pricing strategies or reducing operational costs.
If you notice significant changes in estimated profits compared to previous years’ performance, adjust quarterly tax payments accordingly. This helps avoid overpaying or underpaying taxes, which can lead to penalties and interest charges from the IRS.
As you estimate your profits throughout the year, be mindful of potential tax deductions that could lower your taxable income. These may include expenses such as business travel, office supplies, or employee benefits (as discussed in previous sections). By planning ahead and keeping track of deductible expenses, you can minimize your tax liability and keep more money in your pocket.
Plan Today For Next Year’s Taxes
By following these tips, small business owners can avoid owing taxes at the end of the year and keep more of their hard-earned income. Advice from a tax specialist or utilization of accounting software can help guarantee that your finances are kept up to date.
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