As a new business owner, tax season can feel extremely intimidating. There are new processes to learn, new forms to complete, and new deadlines to meet. Plus, an error on your business taxes can come with a hefty price tag. The IRS can charge you a penalty of 20% of your total tax liability if they discover incorrect information.
If you’re going to do your business taxes, you’ve got to do them right. Read on for 3 tax tips new business owners need to know.
Keep Your Receipts
If you’ve filed individual taxes in the past, you’re likely familiar with the standard deduction. This is the set amount that the IRS allows all taxpayers to deduct from their tax liability each year without need for receipts or verification. In 2020, the standard deduction for a single filer was $12,400.
Now that you’re tackling business taxes, say goodbye to the standard deduction; it simply won’t suit your needs anymore. As a small business owner, there is a wealth of new deductions you can claim, totalling well over $12,400. It would be downright foolish to take the standard deduction.
Instead of opting for the standard deduction on your business taxes, keep all of your receipts and maintain a running total of all deductible expenses, including those associated with:
- Home office expenses: You can deduct $5 per square foot of your home office, up to 300 square feet
- Legal expenses: Any costs associated with legal services for your business can be deducted
- Work-related travel expenses: Flights, hotel stays, and more
- Phone and internet expenses: Be prepared to prove the percentage of your phone and internet usage associated with your business
- Business insurance: Both for your work-related property and your employees
- Salaries and benefits: As long as an employee provides your services, their salary and benefits can be deducted
- Business meals: Take advantage of lunchtime meetings as a business deduction
- Work-related use of your car: You can deduct $0.575 per mile that you drive your car for work
Explore Your Options for Tax Credits
Just as with deductions, being a small business owner opens the door to a number of new tax credits. Here are a few that you may be eligible for:
- Premium Tax Credit: Do you pay for your own health insurance? If so, you may qualify for the Premium Tax Credit, IRS Form 8962. You’ll be able to deduct several thousand dollars from your tax liability.
- Earned Income Tax Credit: If you’re a low-income individual, you may be eligible for the Earned Income Tax Credit.
- Work Opportunity Credit: Do you have employees? This is for employers who hire employees from groups that are historically discriminated against, such as veterans, convicts, and people with disabilities. You may be able to deduct $2,400 per eligible employee.
- Small Employer Health Insurance Premium Credit: Available for those with less than 25 employees who pay at least half of their health insurance premiums. You may be eligible to deduct 50% of the amount you’ve paid.
Don’t Forget to Pay Estimated Taxes
As a W-2 employee, you probably didn’t think too much about withheld taxes. Your employer simply held money back from each paycheck and passed that on to the IRS. At the end of the year, you filled out your tax forms and the IRS told you whether it was enough. Easy as pie. As a self-employed business owner, the process is much more hands on. In order to stay in good standing with the IRS, you’ll need to pay what’s known as estimated quarterly taxes. These are quarterly tax payments in the value of 25% of your total estimated tax liability for the year. At the end of the year, the IRS will compare what you paid and what you owe and inform you of the difference. If you don’t pay enough in estimated taxes, you’re liable to be charged a penalty from the IRS.