You have a lot to do as a new owner of a business. Your to-do list includes everything from creating a business plan to hiring staff.
While you are juggling startup tasks you should also consider how taxes might impact your business. These five tips are provided by Jessie Seaman, a Tax Defense Network tax attorney.
1. Hiring employees vs. subcontractors
If your business is looking to hire employees, should you pay them W-2 employees or 1099 subcontractors. This is a great question and one Seaman gets asked it a lot.
Freelancers work in a freelance environment and are hired project-by-project. Regular hours are set by the company and employees receive regular checks. Seaman warns that if you mix the two, you might be in for a surprise.
She says that if the IRS decides that the worker is an employee and not a contractor, they will impose costly penalties and create a large tax bill due to unpaid Social Security or Medicare taxes.
2. Keep your accounts separate
Although no business owner can be certain that the business will survive its first opening, it’s not impossible to operate your business from your personal account. Seaman suggests that you open a savings and checking account for your business to ensure that business income and expenses are credited to the account.
She says, “This is a crucial piece of advice.” The business bank statements should only be used to pay business expenses. No personal charges or withdrawals are allowed. Owners, shareholders and members could be personally liable for tax liabilities if personal and business funds are mixed.
3. Pay your employees straight
The IRS can get a bit stingy if you don’t pay your taxes, from income tax to Social Security. Seaman says there are many tax forms and schedule payments that employees must understand.
Each employee must fill out a W-4 to report federal withholding. The employer must also match employee’s Medicare and Social Security payments. She explains that this money must be deposited with the IRS weekly, monthly or quarterly.
There are severe penalties if deposits are not made on time or for the correct amount. Regular filings and deposits are required for income tax states and localities, as well as unemployment returns. Annual filings of W-2 and W-3 forms are required with the Social Security Association.
You’re not the only one who finds all this confusing. Many first-time entrepreneurs consult an accountant to make sure that all paperwork is completed and that government payments are received on time. Seaman recommends that you hire an accountant for at least the first year of your business, to help you learn the process.
4. Take a startup deduction on taxes
Seaman states that expenses incurred while starting a business are eligible for a tax deduction.
She reminds entrepreneurs to make sure they take the maximum deduction allowed for startups. You can deduct up $5,000 for startup and research costs.
Research and development can include determining whether the business idea is feasible, training employees, ordering supplies, and evaluating other options.
5. Claim depreciation
You can also claim wear and tear, or the deterioration over time of business items. You can, for example, claim the depreciation of your company computer or fleet of cars.
The IRS says tangible property like buildings, machinery and vehicles, as well as furniture, are all depreciable. Depreciation also applies to intangible property such as patents, copyrights, and software.
To help your tax situation, you can either claim the depreciation over time or in one lump sum.
Seaman states that you may depreciate an asset’s full value in the first year. “But, this should only be done if the company expects to make a profit. Otherwise, it will be a waste of time since no tax will be due.”
Tax planning is something that new entrepreneurs should not overlook. Tax planning can save you thousands of money in the long term.
If you want to know more about Tax expert harlingen tx.
