A proactive approach can make a huge difference in business finances when it comes to tax planning. By planning ahead and making use of several best practices, you can reduce your business tax burden and eliminate the possibility of paying penalties. The alternative is to put off even thinking about taxes until they become due and then run the risk of remitting them improperly or late. If that’s your current strategy, the tips below can help you become more proactive.
Start by Separating Business and Personal Accounts
It can feel tempting to mingle business and personal expenses and income, especially when first starting out as a small business owner. However, we urge you to avoid future problems by setting up separate bank and credit accounts for your business as soon as possible. When it comes time to file your first business tax return, you may not be able to tell which entries are business-related and which are personal. Unfortunately, this could cause you not to claim business deductions you would have easily qualified for if you had the proper proof.
Open an Individual Retirement Account (IRA) or Other Retirement Savings
Without an employer to contribute to your retirement savings, the thought of doing so yourself can end up on the back burner. Not only could this leave you short of funds when retirement comes, but you also miss out on tax savings today. Whether you chose a traditional IRA, Roth IRA, Solo 401(k), or another type of retirement investment, the IRS typically allows you to set aside those dollars tax-free. This is an excellent tax planning strategy since it lowers your current taxable income.
Create an Efficient System for Tracking Business Deductions
It’s important to keep receipts for any business-related purchase you make if you think it might qualify you for a tax deduction. A canceled check, printout from an electronic funds transfer, or a credit card statement are also acceptable. Additionally, ask the business you purchased the product or service from to provide you with an invoice that indicates the date of purchase, description of the purchase, and amount spent. It should be obvious from looking at the invoice that you purchased something for your business rather than yourself.
Use Independent Contractors as Much as Possible
When you hire an employee, the IRS expects you to withhold federal tax, Medicare tax, and social security tax. Additionally, you must match the employee’s social security payment when remitting payroll deductions to the IRS. With independent contractors, you don’t need to withhold anything. The IRS considers them self-employed and responsible for remitting their own taxes. This can save you a substantial amount of money on social security payments alone, not to mention payroll processing savings. Just make sure that you understand the difference between an independent contractor and employee so you can classify each correctly.
Need Additional Tax Planning Strategies?
Rickhoff & Associates is in business to save your business money. We invite you to learn more about our tax planning services by contacting us to request an initial consultation today.