Small Business Taxes

The world of tax law is a strange one. Some might characterize it as boring and imagine people wearing corduroy coats with elbow patches as the only ones suitable for the profession. So, when you start a small business, the thought of understanding taxes and where you fit in with the scheme of things is a daunting one to think about and even worse, you simply don’t have the resources right now to hire a professional.

So, get out the midnight oil and read through this to understand some of the basics. Then go the IRS’s web site to get even more detailed information on what you should know to avoid getting in trouble with the IRS (or worse: being audited).

To begin with, you are not like the average consumer. You will not be paying only sales tax and then having to compile all of your assets together for that dreaded April tax time due date.

Instead, small business owners are expected to pay estimated tax bills. So, instead of just waiting for entrepreneurs to pay their taxes at one time after the fact, the federal government expects you to pay several times throughout the year. They want you to guess what your taxes may be, and then pay up accordingly. If you fall short, you could be taxed even more later on, and then of course, if you overestimate, you overpay. Damned if you do, damned if you (and maybe just damned all around).

So, how do you know if you need to pay? Businesses that have to pay the quarterly estimated taxes must have an annual total tax bill over $500 (which generally speaking, would be most entrepreneurs unless you’re business is more of a hobby).

This quarterly estimated tax should be paid April 15, June 15, September 15 and January 15.

You will also need to pay sales taxes – even if you are selling merchandise over the web. The web just complicates things a little more since you should pay a sales tax wherever your company has what is considered to be a “presence” in a state. A “presence” would be having a warehouse or employees in that state. If you are selling a service, you may be exempt from sales tax. However, most products are subject to sales tax (except for food and drugs).

However, even if you do not have a presence in a state, but sell products to people in a state over the Internet, you should pay what is called a “use tax.”

The due dates on when you pay this sales tax vary from state to state.

Aside from these taxes, you should also make it a point to invest in storage space to archive your tax documents (especially if you end up being audited). Some experts believe you should keep you tax documents (such as receipts and the like) for at least 10 years. However, items such as business licenses or papers related to your business incorporation should be kept forever in a safe place.

When it comes to write-offs, you should be careful and if you don’t know, don’t guess. A lot of people take advantage of write-offs which is why the IRS has shortened its leash – especially for small business since the IRS estimates that approximately 40 percent of its loss in taxes is a result of small business owners not paying the correct amount or reporting the correct amount on returns.

For a business owner, you can write off any expense related to your business from your taxable income. Obviously, equipment and employee salaries are easy to decide. However, you should never mix your personal with your business. If you are taking a trip that is for both business and pleasure, do not report it as being only for business – you could end up getting yourself into a whole lot of hurt later on. Instead, save the receipts for the expenses related only to your business.

Once your business is well off enough to employ others, you will pay several taxes including a withholding tax (for social security, Medicare and federal and state income taxes), employer matching (businesses are required to match the FICA and Medicare taxes) and unemployment tax.

And after all of this, if you are still subject to an audit, don’t get too nervous. There are several types of audits and some are not as scary as others.

A correspondence audit is simple enough. The IRS may ask you to send in a document that will help verify an item on your return. In other cases, you may have to show proof of something, but you will have to go to a local IRS office to show these items, which is called an office audit.

A field audit, is the one most people are familiar with. This is when the IRS requires that you provide all sorts of documentation on a number of things listed in your return. You will be asked questions by an auditor and your records will be reviewed. A criminal investigation audit is when the IRS suspects you of tax evasion. This usually means you should hire a lawyer.

While this isn’t meant to be comprehensive by any means, hopefully this helps in getting you to know the basics of what you should be prepared to do to start your business off on the right foot in the eyes of the law.