Every business owner wants to know how to save on taxes. They are the bane of our existence. For better or for worse, taxes have to be paid to keep your business going. Our job is to make sure you don’t overpay the IRS. As you’ll see in an example later on, they are takers, and you won’t get that money back. A big problem with this scenario is most business owners don’t even realize they are overpaying on taxes. But you’re not going to be one of them.
A foundational tax saving strategy is choosing the right business entity. Which has huge tax saving benefits but is far from the only thing you can do. Below are some of the more basic principles and strategies you should follow as a business owner to be on top of your finances and save tons on your taxes.
Sole Proprietors Do Have Tax Benefits
Remember, even the most basic business entity, the sole proprietor, has tax benefits. Make sure you are taking advantage of them. As a sole proprietor, you’ll use a schedule C to report and file your taxes. Too many business owners are not business minded when operating as a sole proprietor. You may not have liability protection, but for tax purposes, you are a business. All the general business tax rules and regulations that benefit large corporations apply to you equally. You might think that you don’t have any expenses, but you cannot run a business without them. Claim all of them.
Accounting is Not Just for Taxes
Don’t follow the “Oh, crap, taxes are due so we should go through our books really quick” accounting strategy. It doesn’t work. You’re missing deductions or some expenses might be categorized incorrectly. You could be waving red flags at the IRS and not even know it.
Accounting is so much more than tax prep. Without consistent and accurate accounting throughout the year you don’t have the relevant data to make proper business decisions. Accounting is really the language of business. It can tell you how to save on taxes. Another issue with playing continual catch-up is that both problems and opportunities are spotted too late or not at all. Keeping your books updated and accurate will help make the whole tax filing process smoother, faster, and help increase your tax savings.
Taking your accounting more seriously will significantly impact your business for the best. More money for your business and less for the IRS. Just how we like it.
Don’t Mix Business with Pleasure
You’ve heard the saying, but did you know it also applies to bookkeeping? To put it another way, having personal expenses in your business accounts or business expenses in your personal accounts is a huge red flare shot directly at the IRS inviting them to give you an audit. Trust me, you don’t want that.
Mixing personal and business transactions is also another way you are missing deductions, because maybe the expense wasn’t taken from your business account. We make mistakes, so it’s not a big deal if you accidently use your business card for a personal purchase once or twice. But it’s a very big deal if it’s a habit, or worse, you don’t have a business account. You need a business account, and it must be completely separate from your personal account. It will make things much easier for you.
Classify Your Employees Correctly
W2 or 1099. Team member or independent contractor. This is one of the most debated topics among small business owners. And everyone has their opinion on what you should do, and the other way is totally wrong. Don’t let their opinions be the basis for your decision.
As far as how to save on taxes for both you and the employee, classifying them as an independent contractor may be the better option. But that’s not always possible. I recommend seeking out the tax rules. The government has specific guidelines for classifying your team members. You can read the IRS guidance in this boring informative article.
Don’t Send them the Wrong Check
Double check the addresses on your payment vouchers to make sure you are paying the state tax with the correct check and vice versa. With most transactions going digital, this shouldn’t be an issue, but I’ve seen it happen. Besides, not all states are the same and we know how governments can be. There are still enough times that we need to pay with a check, that this is worth mentioning. Normally, it would be inconvenient to correct the mistake and take longer to submit your payment. But the IRS is not normal. Guess what happens if you accidently send the IRS a check that’s written out to someone else? They have a stamp that reads “US Treasury” and, no joke, they stamp right over whatever name was on the check. It’s now their money and you can’t do anything about it. If I did that, it’s called check fraud.
Your New Dependent Could Save you Money
Years can go by working with a client and then somehow it comes up that they’ve had 2 children that we didn’t know about. That’s a big deal. You could be losing out on thousands of dollars, just for that. This applies to any and all life or circumstance changes. If you’re not sure, error on the side of disclosing it to your accountant. The worst case is it doesn’t matter for taxes, and nothing is lost. The best case is the IRS owes you money.
Examples include if you have a new baby, adopt a child, or an elderly family member moves in for you to care for. These are examples of new dependents that will significantly change your taxes. Also, big purchases and sold assets should be declared. Keeping things to yourself is not how to save on taxes. As much as we’ve tried, we still can’t read minds, so please tell us about any changes.
Don’t sabotage your own tax saving efforts by not following these basic strategies.
It’s not too late to make changes that will save you on this year’s taxes. In fact, now is a great time to look at where you’re at, make necessary changes and plan for next year.
Maximize your tax savings!
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