For many people, the most dreaded time of the year is tax season, and this is especially true for young entrepreneurs. Even those who handle other financial matters with ease find taxes to be extremely confusing. Fortunately, statistics show that the mistakes many entrepreneurs make are quite simple, and if you follow the valuable tax tips listed below, you will have no problems getting through this stressful time of the year.
Always Stay Organized
First things first, you must stay organized throughout the entire year. What this means is, you need to save all business-related receipts, both large and small. Additionally, make sure that you keep your receipts neat and organized. In this way, you will easily be able to find them if necessary.
You also need to keep all of your financial records updated and organized in some way. Some people find that keeping track of their finances by using accounting software is a tremendous help when tax season arrives. The best thing about electronic accounting software is that you can access your income statements or balance figures any time you need to.
Ask for Help
Secondly, never be afraid to get professional help when preparing and/or filing your tax returns. While you may be tempted to save money by doing your taxes on your own, an experienced tax professional is worth the small investment. A professional knows all of the current tax laws, deductions and credits that can help you stretch your hard-earned money at tax time.
Do Not Mix Personal and Business Expenses
This is a mistake that many young entrepreneurs make at tax time. Although you may be tempted to write off that trip to Hawaii as a business trip, if it was not business-related, do not do it. The IRS will find out and when they do, you will be penalized severely. Keep all personal accounts and expenses separate from those that are related to your business.
File Your Taxes on Time
Many people wait until the last minute to file their taxes, at which time they are often faced with penalties. Never wait until the last minute to file your taxes. Filing on time not only ensures that you will avoid any late penalties, but you will also have more time to gather together any paperwork you may need.
Furthermore, in some cases, you may need to pay quarterly estimated tax payments. If you are unsure whether or not you need to do this, check with your accountant or an experienced tax professional to find out. You may also need to pay state, city and/or county taxes as well.
Choosing the Best Business Structure
You have several different business structures you can choose from depending upon the nature of your business, and each one has its pros and cons. While some common structures include partnerships or proprietorships, most young entrepreneurs can benefit from choosing an S corporation.
In an S corporation, you have a regular payroll and will make monthly payments to the IRS. In this way, while your salary will be subjected to payroll taxes, only your profits will be subjected to income taxes. This can literally save you thousands of dollars every year. Again, a professional can help you determine which structure is best for you.
Set Up a Retirement Plan
A great way to save on your taxes is to have a retirement plan in place before you file. While many people choose to contribute to a personal Roth IRA, you may want to choose an individual 401(k) instead. With these retirement plans, the annual contribution limits are much higher than with an IRA, and you are able to make 401(k) contributions with your after-tax income.
However, do not wait until the last minute to set up your retirement plan, as many plans’ rules require that you set up your plan before the end of the year. With that said, be sure to set up your plan before the end of the tax year you wish to file taxes for. Additionally, always check the contribution limits for the type of plan you have.
Lease Your Equipment
As a young entrepreneur, you may think that buying your equipment will save you money. However, when it comes to taxes, leasing can actually help keep money in your bank account. This is because leases are often 100 percent write-offs at tax time. This allows you to deduct your monthly lease payments from your expenses, giving you a fantastic tax advantage.
These are just some of the top tax tips for young entrepreneurs. During tax time, you should also consider these money-saving initiatives: file for an extension (if you need more time), set up a payment plan with the IRS and double-check for any new deductions that may apply to you. When you follow these valuable tax guidelines, you are sure to have no problems during the dreaded tax season.
Jayson is a tax consultant with Top Tax Defenders. When clients come to him with their tax questions, he reviews their financial records and works to lower their tax bills.