Taxes are one of those business topics that you can seem to never know enough about. They can be complicated. Laws change and new rules get added or modified even after new guidelines take effect. Whether you have been in business for 20 years or are just getting started, keeping your tax responsibilities under control requires constant attention. On top of that, there are many different taxes apart from small business income tax to consider. In this article, we’ll:
- Go over some scenarios on how to ensure that you know your tax liabilities.
- Review general tax filing rules
- Help you to figure out when it’s time to hire a tax consultant and/or payroll service.
You’ll find the most use out of these tips if you’re running a small business with an EIN (Employee Identification Number). Let’s get started!
Expense tracking for income taxes
The most important operations task for you as a business owner is cost control and expensing. After you have defined your budget, you’ll need to control costs to stay within that budget and prevent costs from spiraling upward as your business grows. You can have a successful sales year, but if you allow expenses to creep up, your net profit will go down. This will become critically important once you begin to identify the other taxes that you will need to report on and pay to the IRS.
Who really wants to have an excellent year in business only to realize at tax filing time that you’ve experienced a profit loss due to accounting mismanagement? Avoid this. Invest in good customer resource management software (CRM) with an interfacing accounting system. Ensure that it’s front and center of business operations to make for rock solid account reporting.
Any other major business transactions or legal changes should be reconciled to current budgets and brought up-to-date to ensure that your estimated quarterly tax liability is correct. These types of transactions include:
- Property sales
- Joint ventures & partnerships
- New investments
- International business
Carefully tracking every transaction with precision will ensure that your liability at tax time remains minimal.
This is different than personal income taxes. If you own a small business that isn’t a partnership then, by law, you are required to file and pay a quarterly income tax estimate if you expect to owe tax of $500 or more based on a preliminary earnings calculation for the quarter. Considered a pay-as-you-go system, you pay your comprehensive tax estimate quarterly to avoid incurring penalties or fines from the IRS.
Payroll tax reporting
Payroll tax is a broad term that covers IRS taxes tied to your employee’s social security numbers. You are required to collect payroll taxes from your employee’s wages at the individual tax rate. Payroll reporting includes:
- Income tax withholding
- Social Security tax (12.4% up to $128,000)
- Medicare tax (usually 2.9%)
- Federal (FUTA) (6.2% of the first $7,000, minus the state rate)
- State unemployment tax
These tax categories each have different rates applied to your employee earnings. Most businesses cover half of the cost of their employee’s Social Security and Medicare taxes. If you’re running a fully staffed, EIN business and you don’t have an income tax expert working in your accounting department, now is the time to consider talking to a tax professional. Many companies hire payroll services companies to manage their small business income tax.
Businesses are required to charge, collect, and report state and local sales taxes. Receipts and invoices need to display the line item amount for each. How taxes are charged can vary greatly from state to state as well. Some states have origin-based sales taxes while others are destination-based. This simply means that the effective rate applied will either be calculated from the customer’s home state or where the company carries out its business operations. If you sell online, then make sure you know whether you’re required to collect taxes on the goods you sell in other states. A tax expert can help you to make that determination.
Excise taxes are a tax in which sellers must include in the price of the goods or services they sell. Though the term may sound unique, it’s a common tax that we all pay. Goods such as gasoline, cigarettes, and alcohol all have excise taxes included in the sales price.
Specific tax forms are needed to file excise taxes. You can read more on these and other tax specifics in the IRS small business income tax center.
How tax credits and deductions affect your bottom line
Managers should spend ample time each year reviewing their business operating expenses and current IRS guidelines to try and identify opportunities to improve their bottom line through tax credits and deductions. Deductions have a cap on how much of them can be applied towards your tax liability calculation, whereas tax credits reduce what you must pay dollar for dollar.
Properly applied, you can end up with a federal income tax bill that looks very different than your competitor with the same revenues for the year. If you or your tax consultant can ID a new tax credit, you deserve a pat on the back.
SD Mayer has worked with companies like yours for decades to help them to become more successful at what they do best—making sales running their business. We put to work decades of combined experience for our small business clients to ensure they can accurately collect, report, and disburse federal income tax payments on time. We would like the opportunity to have a conversation about your company and your concerns about taxation. Contact us today to get started.