It’s tax time! For most small business owners, this time is all about finding ways to save money and maximize deductions. It can all be a bit overwhelming, even if you’re savvy with numbers.
Fortunately, there are ways to make tax season less of a headache and more manageable. Below, we have provided some tips that will equip you to be smarter about how and when to file taxes so you get the best returns.
1. Gather the Paperwork
We know — you wish you could skip to the good part and just get a big fat tax refund. Unfortunately, that's not how it works. Filing the appropriate federal, state and local taxes is a cornerstone of running a successful business, whether you are running one from a foreign country, as a side gig or an ecommerce shop.
Here are a few things you need to do before you get down to completing your tax forms.
- Gather all business bank statements, income statements and expense records.
- Get your business's EIN (Employer Identification Number). For sole proprietors, you'll need your Tax ID number, which is generally your Social Security number.
- Gather all the tax forms you'll need to file. Depending on your business structure, different forms may be applicable.
- Review tax filing deadlines at the state and local levels (our chart below can help).
You may need to file taxes in more than one state depending on individual state statutes and how much money you earned from certain states. A tax professional can advise you on the tax jurisdictions your business falls under.
2. Learn How to Reduce Your Tax Burden
Got all the paperwork and dates lined up? Now, it's about identifying areas you can reduce your tax burden via exemptions, credits or deductions. We know it's frustrating to see your hard-earned income go away to the government. Here are a few strategies you can employ to reduce your tax liability and maximize your deductions as a small business owner.
Track Expense Receipts
This might sound like a no-brainer. But we can’t stress this point enough. Making the best of tax season for a small business owner comes down to how well you tracked your expenses. Why? Because the IRS allows for business expense-related deductions.
The top expenses you can write off include:
Startup Costs
If you stepped into entrepreneurship in the latest tax year, you can deduct as much as $5,000 in startup expenses. This amount can include costs associated with any training or travel you took, along with any money spent on marketing your startup.
Business Meals
You can deduct up to 50 percent of your qualified food and drink expenses. What does qualified mean? The meal was related to business. Jot the following in an expense log:
- The date and location of the meal
- The business relationship of the person or people you dined with
- The total cost of the meal
Travel Expenses
Expenses that can be written off for travel include airfare, accommodation cost, rental car expenses, dry cleaning, tolls and tips. However, any work-related travel expenses must meet the following requirements:
- The trip must be necessary for business.
- The trip must take you away from your tax home (city/area where business is located).
- The trip should require you to travel away from home for longer than a business day and require rest or sleep to meet the demands of work. If you rent a car to visit a customer for a day and require to refuel or stop for a meal, this could be deductible.
The IRS website offers a detailed overview of what qualifies as deductible work-related travel expenses.
Home Office and Supplies
Under the simplified home office expenses, if you’re running a home-based business or are a freelancer, then you can deduct $5 per square foot of your home that’s used for business purposes, up to a maximum of 300 square feet. But that area must be exclusively used for work. So if you’re working off your dining table, you can’t write that off even if you want to.
Under office supplies, anything purchased like stationery, computer, printer, work-related software, postage and shipping can be written off as long as you have used them for business purposes in the year of purchase.
Bank Interest and Fees
If you’ve taken a startup loan or line of credit for your business, you can write off the interest charged on the loan or line of credit. You can also deduct any additional service fee or annual fee expenses on your bank account or credit card.
Child and Dependent Care
The work hours of a business owner don’t stop at 5 p.m. Luckily, any costs related to child (those under 12) and dependent care (like parents or family members) are tax-deductible.
The IRS website gives more guidance on which deductions apply to small businesses.
3. Hire Your Kids
One of the best ways to shelter your income from taxes is by hiring a family member, especially your kids. By doing this, you can reduce the tax paid on the income given to them.
Here’s how it can work if your minor kids are up to the job.
- Employ your kids. Draft up an employment agreement with job responsibilities, adequate compensation and benefits information.
- Set up their W-2 and state taxes.
But a word of caution: Don't abuse this as the IRS is on the lookout for those using the benefit without actually employing their kids. If you're found guilty, you'll lose your tax deductions for their salary and benefits.
4. Save for Health Expenses
Medical costs are going through the roof. One way to reduce your tax burden is to set aside money towards medical and health expenses, no matter how healthy and fit you feel today. How to accomplish this? Explore a Health Saving Account (HSA) plan if you have a high deductible insurance plan.
The HSA also yields the following benefits:
- Contributions are 100 percent tax-deductible from income — making it a powerful deduction that can potentially put you in a lower tax bracket.
- Contributions grow tax-free.
- Amounts deducted for legitimate medical expenses are also tax-free.
5. Become a Legal Structure
As a sole proprietor, you don’t have an employer paying the portion of Social Security and Medicare taxes. You’re the one on the hook for paying it all.
One way to change this payout is to explore changing your business structure to that of a legal entity that typically offers more tax savings. For instance, if you form an LLC (limited liability company), you might be able to eliminate the employer portion of these taxes.
6. Start a Retirement Plan
As a business owner, you don’t have the benefit of a retirement plan, which is ideally matched by an employer. It’s your job to ensure you have enough in the bank for retirement. Starting a retirement fund is one way to maximize savings and reduce the potential tax you’d pay.
A few retirement fund plans that you can explore are:
- IRA
- Simplified Employee Pension Plan (SEP)
- 403(b) plans
7. Learn Your State's Specific Rules
Thanks to Good Friday, federal tax filings are due on April 18 this year. But your state's tax deadline might not be the same. Yep, different states can have varying income tax and sales tax filing dates. And you could face penalties for missing your state's filing date.
Use the form to see state-by-state filing deadlines and tips for filing taxes for small businesses. It's also important to point out that while many states allow for mail-in forms, e-filing your taxes makes for quicker processing.
Select your state above.
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4%
- Monthly payments due on 20th of following month
- Quarterly payments due April 20, July 20, October 20, January 20
Known at TPT, 5.6%
- Paper filings are due 20th/22nd of month. Electonic filings are due on last working day of month.
6.50%
- Monthly payments due 20th/21st of following month
7.25%
- The CDTFA assigns a filing frequency (quarterly prepay, quarterly, monthly, fiscal yearly, yearly)
- Quarterly payments are due April 30, July 31, October 31, January 31
2.90%
- Filing frequency is determined by the amount of sales tax collected monthly
- If less than $15/monthly, annual filing is due January 20
- If under $300/monthly, quarterly payments due April 20, July 20, October 20, January 20
6.35%
- Quarterly payments due April 20, July 20, October 20, January 20
6%
- Quarterly payments due April 20, July 20, October 20, January 20
4%
- Monthly returns are due on 20th of following month
- Quarterly payments due April 20, July 20, October 20, January 20
6%
- Monthly returns are due on 20th of following month
- Quarterly payments due April 20, July 20, October 20, January 20
6.25%
- Monthly returns are due on 20th of following month
- Quarterly payments due April 20, July 20, October 20, January 20
7%
- Monthly returns are due on 20th of following month
- Quarterly payments due April 20, July 20, October 20, January 20
6%
- Monthly returns are due on 20th of following month
- Quarterly payments due April 30, July 31, October 31, January 31
- If sales tax less than $120, annual returns due January 31
6.50%
- Monthly returns are due on 25th of following month
- Quarterly payments due April 25, July 25, October 25, January 25
6%
- Monthly returns are due on 25th of following month
- Quarterly payments due April 20, July 20, October 20, January 20
4.50%
- Monthly returns are due on 20th of following month
5.50%
- Monthly returns are due on 15th of following month
- Quarterly payments due April 15, July 15, October 15, January 15
6%
- Monthly returns are due on 20th of following month
- Quarterly payments due April 20, July 20, October 20, January 20
6.25%
- Monthly returns are due on 20th of following month
- Quarterly payments due April 20, July 20, October 20, January 20
6%
- Monthly returns are due on 20th of following month
- Quarterly payments due April 20, July 20, October 20, January 20
- Annual return due on February 28th of following year
6.80%
- Monthly returns are due on 20th of following month
- Quarterly payments due April 20, July 20, October 20, January 20
- Annual return due on February 5th of following year
7%
- Monthly returns are due on 20th of following month. A sales tax discount of 2% of tax due is applied if paid on time, not to exceed $50.
- Quarterly payments due April 20, July 20, October 20, January 20
4.23%
- Monthly returns are due on 20th of following month
- Quarterly payments due April 20, July 20, October 20, January 20
5.50%
- Monthly returns are due on 20th of following month
- Quarterly payments due April 20, July 20, October 20, January 20
4.60%
- Monthly returns are due on last day of following month
- Quarterly payments due April 30, July 31, October 31, January 31
6.63%
- Monthly returns are due on 20th of following month
- Quarterly payments due April 20, July 20, October 20, January 20
5.13%
- Monthly returns are due on 25th of following month
- Quarterly payments due April 25, July 25, October 25, January 25
4%
- Monthly returns are due on 20th of following month
- Quarterly payments due April 20, July 20, October 20, January 20
- Annual filings due March 20 of following year
4.75%
- Monthly returns are due on 20th of following month
- Quarterly payments due April 30, July 31, November 2, February 1
5%
- Monthly returns are due on 1st after 1 month (January tax will be due on March 1st)
- Quarterly payments due April 30, July 31, November 2, January 31
5.75%
- Monthly returns are due on 23th of following month
- Quarterly payments due April 23, July 23, October 23, January 23
4.50%
- Monthly returns are due on 20th of following month
- Quarterly payments due April 20, July 20, October 20, January 20
6%
- Monthly returns are due on 20th of following month
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7%
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6.00%
- Monthly returns are due on 20th of following month
- Quarterly payments due April 20, July 20, October 20, January 20
4.50%
- Monthly returns are due on 20th of following month
- Quarterly payments due April 20, July 20, October 20, January 20
7%
- Monthly returns are due on 20th of following month
- Quarterly payments due April 20, July 20, October 20, January 20
6.25%
- Monthly returns are due on 20th of following month
- Quarterly payments due April 20, July 20, October 20, January 20
4.85%
- Monthly returns are due on last day of following month
- Quarterly payments due April 30, July 31, October 31, January 31
6%
- Monthly payments due by 25th of following month
- Quarterly payments due April 25, July 25, October 25, January 25
4.30%
- Monthly returns are due on 20th of following month
- Quarterly payments due April 20, July 20, October 20, January 20
6.50%
- Monthly returns are due on 25th of following month
- Quarterly payments due April 30, July 31, October 31, January 31
6%
- Monthly returns are due on 20th of following month
- Quarterly payments due April 20, July 20, October 20, January 20
6%
- Monthly returns are due on 20th of following month
- Quarterly payments due April 20, July 20, October 20, January 20
5%
- Monthly returns are due on last day of following month
- Quarterly payments due April 30, July 31, October 31, January 31
4%
- Monthly returns are due on last day of following month
- Quarterly payments due April 30, July 31, October 31, January 31
8. Work with a Professional
Whether you like it or not, paying taxes is one of the responsibilities of being a small business owner. Also, doing taxes wrong can be a costly mistake. The IRS can and most definitely will hand out hefty penalties if they find you skimping on taxes.
With a little bit of planning and help from an accountant or a tax professional, you can reduce your taxable income and ensure more of your money is working for you.
Incfile’s bookkeeping and accounting services can help reduce the burden associated with preparing and filing for taxes. Our qualified tax professionals can work with you to understand your business and file taxes in a manner that will give your business the best plan for success.
Swara Ahluwalia
Swara Ahluwalia is a freelance content writer with experience in the technical, B2B and SaaS domain. She also has curated content for various lifestyle brands. In her downtime, you will most likely find Swara training for her next marathon or spending time with her two daughters.
