Paying Taxes: Important Reminders & Records to Keep for Small Business Owners
Tax seasons come and go, but as the owner of a small business preparing for taxes is ongoing. Whether you are a sole proprietor or partner in a business, an independent contractor, or someone with a lucrative side hustle, knowing about taxes is vital. You’re responsible for two main types of taxes: income tax and self-employment tax. These are automatically withheld from your paycheck when you are employed by someone else, but if you are self-employed, you are still responsible for paying. Make sure to figure these costs into your business’ fee structure from the beginning so you aren’t challenged at tax time.
Self-Employment Taxes to Know
Income taxes are based on business income, which you can calculate by first determining your business’ net profit or loss. There are then online calculator resources to estimate your tax amount. If it looks like you’ll owe more than $1,000 in taxes, you’ll need to make quarterly tax payments throughout the year.
Self-employment tax refers to Social Security and Medicare taxes. This tax rate is 15.3%, with 12.4% going to Social Security and 2.9% for Medicare. Since an employer normally pays half of this, you can claim that half as a deduction when figuring your adjusted gross income.
Keeping Good Records for Taxes
The listed items on your tax return creates a burden of proof that needs to be backed up by records that can prove the entries on your tax documents are valid. Records that support anything on your tax return relating to income, credits or deductions should be kept for at least three years, or longer in some cases. While the IRS sets guidelines, it also suggests consulting with experts ranging from your accountant or attorney, to even your insurance company and follow their recommendations.
Important documents to keep include invoices for goods and services you pay for, as well as things that you are paid for. These items are part of your profits and losses for the year, and if you list these on your tax return, you need to have the documents to back them up.
You also should keep bank and credit card statements along with canceled checks and receipts. If you have employees, you should keep records relating to names, Social Security numbers, wages, tax deposits, annuities and other information for at least four years.
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Categories for Tax Deductions
By keeping good tax records and retention strategies, you will have appropriate documentation in the event of an audit. You’ll have back-up information to support the expenses used as tax deductions. It is recommended you work with a tax professional to understand what can (and should) be claimed as a tax deduction. Some tax deduction categories to be aware of include:
- Bank Fees & Loan Interest. Account fees, check-printing costs, and interest on loans and lines of credit.
- Utilities & Communication. Includes necessities like water, electricity, garbage pickup, security fees, phone and Internet.
- Hiring. Like worker wages, commissions and health insurance.
- Insurance. Note premiums for workers’ comp, property, and business liability.
- Legal & Professional Fees. Payments for attorneys, accountants or other professional consultants.
- Licenses & Dues. Include business and professional licenses and franchise fees.
Since the tax forms you need and any deductions that you may qualify for can be complicated, it’s a good idea to consult a tax professional to help you work out the details and avoid any costly mistakes. You can also find more resources and information at irs.gov.
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