- What changes when you file taxes as a small business owner?
- Common tax mistakes for the self-employed
- Small business tax tips you need to know
Q: What do I need to do differently if I’m filing my taxes as a small business owner?
A: Filing your taxes for the first time as a small business owner can be intimidating. While self-employed taxes are almost always a bit more complicated, there are a number of things you can do to make the process easier while saving money. This article explores the common mistakes small business owners make with their taxes and how to fix them.
The last few years have been an economic rollercoaster. The massive market shifts caused by the pandemic and the ensuing political and social changes mean many people’s work statuses have changed.
One of the most common changes is a shift to self-employment. Small business formation boomed during the pandemic, meaning there are tons of newly self-employed workers.
Self-employment can simplify life in many ways, adding flexibility and control to your work schedule. But when it comes to taxes, many find themselves frustrated and confused.
Luckily there are a few handy small business tax tips you can learn to make tax season less scary. Here’s how to save money and time when filing your taxes.
- What changes when you work for yourself?
- How self-employed taxes differ from typical employment taxes
- Common tax mistakes the self-employed make
- The small business tax tips you need to know
What Changes When You Work for Yourself?
Working for yourself means operating as an independent financial entity. You gain the freedom to set your own hours and make money the way you want.
But with that freedom comes responsibility. You must learn how to:
- Regulate your work-life balance
- Handle your business expenses
- Properly register your business
This can be understandably overwhelming. Creating structure and stability without answering to anyone else requires new skills and attitudes.
The way you handle taxes is no exception.
How Self-Employed Taxes Differ from Regular Employment
When you work for someone else, your taxes are often automatically taken out of your paycheck.
In fact, you frequently overpay taxes when employed by a business or corporation. That’s why you get a tax refund when you file your taxes.
Additionally, the amount of tax you owe is smaller when you’re an employee. You’re only liable for one half of the tax equation.
Income taxes can be broken into employer taxes and employee taxes. When you work for someone, your employer handles the employer taxes, meaning you only have to pay the employee tax rate.
But when you go into business for yourself, all that changes.
You’re now responsible for the whole of your taxes, meaning you’ll have to pay a higher proportion of your income to the government.
On top of that, your payments aren’t going to include automatic tax withholding any longer. You’ll have to set aside money for your taxes each time you receive payment.
These changes can be confusing, which is why the newly self-employed often make mistakes.
Common Tax Mistakes of the Self-Employed
Not Filing On-Time
Many of the people looking for small business tax tips could benefit from simply filing on time.
People often forget to pay their taxes on time. When this happens, you wind up getting hit with late fees that make your taxes even more costly.
Don’t wait. Even if you aren’t perfectly sure how to properly file, reporting your income on time will save you from late fees.
Not Tracking Expenses
Another issue the self-employed face is a lack of insight into their expenses.
It’s easy to forget about the money you spend on your business, especially when it comes to minor expenses.
But those expenses can add up. A single client lunch might not be much, but if you do that every week, it can account for a significant write-off.
Not Properly Evaluating Assets
The final big mistake small business owners often make with their taxes is improper asset evaluation.
If you’re self-employed, there’s a good chance you have some personal assets that could count towards your tax deductions.
Your phone, laptop, and car can all count as business assets if you use them for work.
People often forget to include these when filing their taxes, leading to overpayment.
On the flip side, some people accidentally write off these mixed assets completely. If audited, this can result in fines and late fees, neither of which are good for your finances.
Luckily there are a few easy tips you can follow to ensure you don’t face these issues.
Small Business Tax Tips
Now that we’ve explored how taxes impact small businesses, let’s move into a few tips you can use to make tax season a little easier.
Get a Business Account
The first and perhaps easiest tip is to get a separate bank account for your business.
A business account makes your taxes far easier to file, as all of your business expenses are collected and mapped out in one place.
Additionally, having a business account can help protect your personal finances.
If you pay taxes from a business account, an IRS audit will likely be confined to that account. This means your personal accounts won’t fall under investigation.
Adding this bit of protection is generally a wise financial move.
Use the Right Tax Software
As a small business owner or self-employed worker, your taxes will almost certainly be more complicated than a typical employee’s.
This holds true whether you work for yourself full-time or you’re just working on your side gig.
You’ll likely have to file multiple 1099 forms and perhaps include additional sources of income while filing.
On top of that, most self-employed have numerous, easy-to-miss business expenses you wouldn’t think to include.
You’ll want to get the right tax software to help organize your many different forms and sources of income.
More advanced tax software will also help you catch all the business expenses you might leave out, helping you maximize your deduction.
Don’t Forget About the Home Office
Finally, don’t forget to account for your home office.
Did you buy a desk or a couch from which to work? Do you pay for WiFi so you can conduct your business? Do you use your laptop and phone for work-related activities?
Chances are, you answered “yes” to at least one of those questions. Don’t forget those factors when filing!
Your home office doesn’t even have to be a dedicated room. Wherever you work from, if you furnish it and pay to make it a viable workspace, you can include it in your tax write-offs.
One thing to note though: these assets probably aren’t entirely work-related.
Your phone may make work calls, but you probably also use it to call friends or surf the web when you’re off-duty.
To account for this, you need to file these expenses according to the percentage you use them for work.
So, if you use your phone for work 60% of the time, you can write off 60% of its value as a business expense.
Tax policies change, and there are plenty of nuances within tax law that require an expert understanding to explain.
Luckily, you don’t need to be an accountant to make self-employed tax filings easier and less expensive. Follow the tips above and you’ll save time, money, and energy this tax season.
- Small Business Tax Information
- How to File Federal Income Taxes for Small Businesses
- Best tax software for small business owners in 2022: Save time filing and get your maximum refund
- Work Phone and Business Phone? How a Virtual Receptionist Makes Your Business More Professional
If you’re thinking about launching your own small business, Alliance Virtual Offices is here to help. Our virtual office plans provide you with a business address you can use to register your business, regardless of where you work from.