Staying on top of your tax planning can be challenging when running a business. That’s why it’s essential to set up a strategy that will help you keep more of your profits in your pocket.
A good strategy will also help you avoid tax mistakes that could hurt your bottom line. Here are a few familiar small business owners often make:
Organize Your Business Entities
One of the most crucial decisions you’ll make as a small business owner is selecting the appropriate business entity type. It has an impact on the economics and legal exposure of your company.
The most prevalent business entities are sole proprietorship, general partnership, limited liability company (LLC), C corporation, and S corporation. Each has pros and cons, so discussing these options with a tax professional is essential.
In addition to choosing the correct business entity, you’ll need to determine where your company will be organized or incorporated. This decision will impact the amount of taxes you pay and the ease with which you can access funding from investors or lenders.
Your firm’s location will depend on various factors, including state-specific financial incentives.
Work with a CPA
Running a successful business requires careful tax planning. Because it’s a complicated undertaking, it’s essential to collaborate with a certified public accountant to ensure you adhere to all the necessary regulations.
CPAs also offer financial guidance to small firms, focusing on small business tax deductions at crucial moments, like when launching a new business or substantially altering your business structure. They can help you decide which type of business structure will save you the most money on taxes, and they can represent your company in case you get audited by the IRS.
When deciding which CPA to hire, find out their hourly rate and ask them about any other fees that may apply. Estimate Your Taxes
You could make due tax payments quarterly if you’re self-employed or a small business owner. An approach to avoid making hefty lump sum payments at
the end of the year is to make estimated tax payments.
To estimate your taxes, you must assess your income and expenses for the coming year. This can be done with the previous year’s earnings or by projecting future income based on current costs.
You can also use accounting software or apps to help you with your estimations. These software packages can give you insights into potential deductions and allow you to track your business expenses and revenue.
Once you have an estimate, you can set aside money for your estimated monthly tax payments. You should keep these funds separate from your finances so you don’t find yourself tempted to spend them for anything other than preparing for taxes.
Plan for the Future
Planning for the future can feel daunting, but it doesn’t have to be. By identifying and implementing key steps, you can maximize your chances of accomplishing your goals while staying true to your values.
Making tax payments with a strategy is one of the best tactics. For instance, delaying your revenue till January could save you money by avoiding higher tax rates if you know a client will pay you in the new year.
Additionally, monitoring your spending is critical, particularly during a recession. This will help you as you struggle to make ends meet by preventing a cash flow disaster. The easiest way to achieve this is to set up an emergency fund that will cover your living costs in an emergency. After that, you can focus on expanding your company and keeping your staff content.