Small Business Taxes 101: Everything You Need To Know

Small Business TaxesTaxes.

There is nothing quite like the word “taxes” to instill fear into the heart of a small business owner. Not many owners are truly confident in legal areas like taxes. New tax laws are implemented every year (think of the implications of Obamacare for 2014 taxes) and you’re too busy running your tiny empire to keep up with tax laws.

Plus, you have no desire to learn taxes.

But hear me out before you click away and just “outsource” your small business taxes. Even if you hate everything about taxes, if you want to run a successful business, you do need to understand the basics.

(Disclaimer: this article isn’t meant to give you any specific tax advice, just advice on how to handle taxes as a small business owner.)

 

No One Wants to Deal with Taxes - But There are NO Excuses

1930’s famous criminal mastermind, Al Capone, wasn’t taken down by the Feds who were after him for years. The Feds knew he was a murderer and the head of Chicago’s mob. But it was tax evasion that brought down the slippery Capone.

That tells you a little something about the importance of taxes.

Taxes are just another facet of your business. You can’t ignore them – they’ll never go away. The only thing to do is learn how to deal with them.

Here’s a few things you need to understand before we get started:

  1. Feigning ignorance won’t save you
  2. Denial won’t save you
  3. You don’t need to become a tax expert
  4. You do need a working knowledge of the tax system, business law, filing and preparing taxes
  5. It won’t be as hard as you think

The last one is the most important. I promise you that it’s better to “grin and bear it” and learn this stuff. Once you get a handle on your tax situation, you’ll be in a much stronger position down the road.

But before we get ahead of ourselves, let me answer your first question:

“Can’t I just outsource everything?”

 

Why Outsourcing Isn’t the Complete Answer

You may be thinking that you’ll just outsource the entire thing.

And let me warn you why that’s not a good plan…

There once was a small business owner who hated everything about taxes. She didn’t think she needed to learn anything about taxes when you can simply pay someone else to do it for you.

So she outsourced everything to accountants. Her first accountant was expensive, but did the job. She tried a second accountant because she thought it would save her some cash.

With the second accountant, our business owner paid a lot less in small business taxes – which is the dream of every small business owner. Unfortunately, the second accountant was only an expert at drawing the attention of the IRS.

The second accountant ended up in jail, and the small business owner ended up with audits. Lots and lots of audits…

When you sign your taxes, it’s a legal document. YOU are the responsible party. Your accountant or tax preparer is also responsible, but it’s your name on the document.

Outsourcing is certainly an answer, and we’re certainly not suggesting you handle your taxes yourself. We’re also not suggesting that every tax professional is a criminal or fraud. Rather, we’re suggesting that outsourcing your taxes isn’t the complete answer.

The complete answer is that you still need to understand the tax system and have a working knowledge of your tax responsibilities.

Here’s the mindset you need to have stress-free taxes:

Since it’s your name on the legal document, you really can’t afford to have zero knowledge about your business taxes.

 

Start With The Basics

Not all industries or states are the same. That means, not all tax obligations are the same.

Hobby or Business

There are millions of small businesses in the world. And not all of these businesses are true businesses, in a legal sense. One of the first things you have to understand is whether or not you have a hobby or a business, and the tax implications of each.

Check out these resources to see how the government views your business taxes:

– United States: Business or Hobby? Answer Has Implications for Deductions

– Canada: I make a few bucks from my hobby. Do I have to declare this income?

– United Kingdom: Working for yourself

– Australia: A Business or a Hobby?

 

State/Country Specific Tax Information

No two areas are exactly the same when it comes to taxes. Each state, province and country is unique. Not to mention any specific local taxes you may be liable for.

Check out these resources to start understanding your businesses specific tax obligations:

– United States: Determine Your State Tax Obligations

Determine Your Federal Tax Obligations

Starting a Business

– Canada: Canada Revenue Agency: Business

Small Business Canada: Tax Information

Checklist for small businesses

– United Kingdom: Business Tax 

– Australia: What taxes do I need to register for?

You don’t have to understand the entire tax system for your area. But you should have a working knowledge of your minimum legal obligations.

Also, you need to see if you’re responsible for paying taxes outside your area, including equipment bought in another state or having customers in another country.

 

Do You Have to Pay EU VAT Taxes? Tax Implications for Global Digital BusinessesJust because you’re not an EU business, doesn’t mean you don’t have to pay taxes in the EU.

If you’re in the European Union, you already know about value added taxes (VAT). Each country in the EU has a different tax percentage, and EU businesses already understand VAT. But many businesses outside the EU have no idea what VAT is, or what it means in terms of taxes.

Starting in 2015, there are new implications for digital businesses across the globe. And it’s been a huge nightmare for many small businesses. Now, instead of charging VAT based on the seller’s location, the EU now collects VAT based on the customer’s location. So if you’re an Australian digital business, and you sell to a customer in the UK, you have to pay the VAT to the EU.

The biggest takeaway for any startup or small business is to be prepared. All digital businesses use an eCommerce framework to sell their products. Some eCommerce frameworks handle VAT for you, and some don’t. Choose an eCommerce solution that handles VAT for you, if you don’t want to be involved in the process.

Check out this article to see a few VAT-friendly eCommerce solutions: Don’t Let EU VAT MOSS Kill Your Business! Find Your eCommerce Solution

And learn more about VAT and digital businesses: VAT: businesses supplying digital services to private consumers

 

Employees, Self-Employed, Contractors, & Freelancers

Titles are extremely important when it comes to taxes. For example, many small businesses use “contractors” or “freelancers” instead of “employees”. How you structure your business, and how you pay your workers matters when it comes to taxes.

– United States: Businesses with Employees

Independent Contractor (Self-Employed) or Employee?

– Canada: Employer responsibilities – The payroll steps

Determine if you are an employer, trustee or payer.

– United Kingdom: Employing people

Employing staff for the first time

Hire and train staff

– Australia: Employing people

Before you choose to hire anyone, be sure to understand the tax ramifications for your business. Maybe your business needs employees instead of independent contractors (which may save you some money). And maybe you’ll never grow without real employees.

Either way, it’s a huge decision for your business and you’ll need all the information before you can make a sound decision.

 

Organization is the Key to an Easy Tax Season

No matter how you handle your taxes, whether you do them yourself or outsource the job, organization is the key to success. Happily, we’ve moved past the need for stuffing receipts into shoeboxes and can now organize the majority of our finances electronically.

You don’t want to spend time chasing down lost receipts, or not qualify for deductions because you have no idea how you spent your money. Below are some very helpful apps/programs that will help you stay organized throughout the year and prepare for tax season.

1) Evernote has so many features I can’t possibly list them all. Check out 5 Steps to Simplify Your 2014 Taxes with Evernote.

2) Shoeboxed helps you organize receipts, expense reporting, accounting, bookkeeping, and tax preparation. Read Shoeboxed’s Definitive Guide to Commonly Missed Small Business Tax Write-offs.

3) Mint helps you get a handle on your finances the free and fast way. Mint does all the work of organizing and categorizing your spending for you. See where every dime goes and make money decisions you feel good about. Read 5 Ways Mint.com Helps at Tax Time.

4) Expensify is a great way to keep track of your expenses without it feeling like your teeth are being pulled. The best part? It integrates with Xero and QuickBooks seamlessly. Check out How Do You Expensify: Tracking Tax Deductible Expenses.

5) Xero makes accounting quick, painless, and is kicking butt while taking names in the small business community. It’s great if you have employees or have bank accounts in different countries. Plus, it integrates with hundreds of add-on business applications. Check out their Add-On Marketplace.

6) QuickBooks Online is similar to Xero, but a little cheaper. It may be the King of small business accounting software. It has way too many features to list, but it’s their small business tax support that makes them stand out from the rest. Check out Schedule C for Small Business Owners: 6 Tips to Make Tax Time a Breeze.

Amazing DIY Programs to Simplify Tax Season

Before these amazing programs were developed, no one in their right mind would ever handle their own business taxes. It’s way too complex and complicated.

But there are DIY programs that can handle small business taxes easily, if you want to try them yourself. They are not overly complicated and they hold your hand through the entire process. These programs are certainly not for everyone, but are fast, credible, and affordable if you want to try the DIY approach.

1) Turbo Tax Business is an easy, step-by-step program that walks you through the process. They have an option for both self-employed and small businesses. One aspect that’s worth mentioning is their Audit Support Guarantee. Hopefully you’ll never have to use this option, but it’s there if you need it. They also search over 350 tax deductions so you get the maximum deduction and tax refund. Read Little-Known Tax Tips For Small-Business Owners.

2) H&R Block’s Premium option is best for the self-employed and rental property owners. Like TurboTax, it’s a simple process and easy to use. They have a free in-person audit support, and maximum refund guarantee. Plus, they offer unlimited tax advice by phone or chat. Read Five Important Tax Implications of Starting Your Own Business.

3) TaxACT is another online tax platform for small businesses. They have different options depending on the size of your business including Small Business, and Sole Proprietor & Self Employed. Like the other programs, it’s simple and easy to use. Check out You Got This Weekly Series: The Tax Implications of Investing in a Business.

The great thing about this software is you can try them before you have to pay anything. If you’ve always wondered if you could do it yourself, just add in your information. You’re not under any obligation to actually file with any of these programs.

If it’s too complex or complicated, or if you’re not comfortable or confident, don’t do it. But if you find it easy and simple, give it a shot.

 

When to Call in a Professional

There are many reasons you may need to hire a professional to handle your business taxes. The biggest reason is if you’re not 100% confident – don’t do it yourself!

If you have a complicated tax situation, including paying taxes in multiple states or countries, you’ll probably need a professional. Plus, many business owners simply don’t want to handle this themselves and would rather pay a professional to do it for them.

But not all tax professional are the same. Check out these common tax professionals to see which one best suits your business needs.

 

Bookkeepers

Bookkeepers are not qualified to handle your taxes. They are not required to have a college degree, but do have to have a strong business background.

They manage your daily financial transactions, including paying bills, making deposits, producing invoices, general ledgers and completing payroll. They are the folks who prepare your business information for the tax professionals.

 

Accountants

Accountants do much more than tax preparations. They also handle payroll, some financial planning, and general bookkeeping. To qualify for the title of accountant, the professional must have a bachelor’s degree in accounting or other financial degree.

As far as taxes are concerned, accountants can:

 

Tax Attorneys

Tax attorneys are lawyers who specialize in tax law. They may also be a CPAs, which enables them to handle the duties of an accountant, as well as those of a legal tax advisor. In general, small businesses won’t need a tax attorney unless they are involved in some type of IRS action.

Commonly, tax attorneys can assist with:

As always, be sure to ask a lot of questions before you hire any tax professional. Our example of the crooked accountant that ended up in jail was extreme. But it’s the worse-case scenario that can happen when you trust the wrong individuals.

Ask around and get recommendations from business associates you trust before you hire anyone to handle your taxes.

 

Wrapping Up and Staying Compliant

In this world nothing can be said to be certain, except death and taxes – Benjamin Franklin

You can’t outrun the tax man. Think of business taxes as a necessary evil that needs to be dealt with every year. Even if you outsource everything, you still need to make critical business decisions based on your tax situation. Your best bet is to accept your fate gracefully and start planning now.

Our goal with this guide was to show you that you don’t have to be scared, frustrated or overwhelmed when it comes to taxes. There is guidance and support available to you.

With the right plan in place, handling your business’ tax doesn’t have to be stressful or overwhelming. Whether or not you handle all your finances yourself or if you outsource everything, you still need a working understanding of your small businesses tax obligations to set up a successful system.

So don’t overlook this essential piece of your business. You’ve got this!

(Disclaimer: this article isn’t meant to give you any specific tax advice, just advice on how to handle taxes as a small business owner.)

 

Meet the Authors

Liesha PetrovichRyan James

Liesha Petrovich and Ryan James are passionate entrepreneurs on a mission to simplify entrepreneurship through your journey as a business owner.

You don’t need to spend $100,000 on an MBA or have any prior experience to start your business today. All you need are core fundamentals, a formula for success, and a bucket of elbow grease.