Last Updated 14 February 2017 | By:

Small Business Taxes 101

Everything You Need To Know

Small Business TaxesThere’s nothing quite like the words “business taxes” to instill fear into the heart of entrepreneurs. Most aren’t truly confident in this specific legal area, primarily because new/revised tax laws are implemented yearly (the “Obamacare” debacle is a perfect example), they’re busy running their companies, and the tax code is insanely complex.

Regardless, even if you dislike anything having to do with taxes, if you want to run a successful business you need to understand the basics. Do keep in mind though that this article isn’t meant to give you any specific tax advice, just advice on how to handle taxes as a small business owner.

1) Why It's Important

Did you know it wasn’t murder, or organized crime, or anything else that brought down Al Capone. They got him for tax evasion. And that fact should tell you a little something about the importance of taxes. They’re a fact of doing business you can’t ignore – 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 isn’t helpful.
  2. Neither is denying the realities of business taxation.
  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’s not as hard as you might think. There are countless tools and services to leverage.

Let’s touch on that last point now, because all too often small business owners believe they can outsource every aspect. Can you? We’d say it’s not ideal.

 

WHY OUTSOURCING ISN’T THE COMPLETE ANSWER

Once upon a time there was a small business owner who hated everything about taxes. She didn’t think she needed to learn anything about taxes when she could simply pay others to handle it. So, she outsourced everything to accountants. Her first accountant was expensive, but did the job. She tried a second accountant to try and save some cash, but unfortunately they were 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 and you’re the responsible party. Your accountant or tax-preparer is also responsible, but it’s your name on the line. Outsourcing is certainly an option, and we’re certainly not suggesting you handle your taxes yourself if you aren’t qualified, or that every tax professional is a criminal or fraud. Rather, we’re suggesting that outsourcing your taxes isn’t the complete answer.

 

THE STRESS-FREE BUSINESS TAXES MINDSET
  • Outsource to credible professionals – Yes.
  • Outsource so you can pretend taxes don’t exist – No.

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

2) Start With The Basics

HOBBY OR BUSINESS

Not all industries or states are the same. That means, not all tax obligations are the same. There are millions of small businesses in America 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 This Guide from the SBA to see how the government views your business.

 

STATE/COUNTRY TAX INFO

No two areas are exactly the same when it comes to taxes. Each state and county is somewhat 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:

You don’t have to understand the entire tax system for your area. But you should have basic 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?

Just because you’re not an EU business, doesn’t mean you don’t have to pay taxes in the EU. Problem is, many businesses outside the EU have no idea what VAT is, or what it means in terms of taxes. Starting back in 2015, new implications came online for digital businesses based in the U.S. and it’s been a huge nightmare for many.

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 American digital business, and you sell to a customer in the UK, you have to pay VAT. All digital businesses use an eCommerce framework, most of which handle VAT, and some don’t. Choose one that does if you sell to European customers and don’t want to be involved in the process.

 

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. Here’s two resources:

Before you choose to hire anyone, be sure to understand the tax ramifications. Maybe your business needs employees instead of independent contractors (which may save money). Or, maybe you’ll never grow without real employees. Either way, it’s a huge decision for your business and you’ll need all the info before you can make a sound decision.

3) How To Stay Organized

No matter how you handle taxes, whether DIY or outsource, organization is key. Happily, we’ve moved past the need for stuffing receipts into shoe boxes and can now organize the majority of our finances digitally.

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 apps/programs that will help you stay organized throughout the year and prepare for tax season.

1) Evernote has so many features! Check out 5 Steps to Simplify Your Taxes with Evernote to get an idea.

2) Shoeboxed helps you organize receipts, expense reporting, accounting, bookkeeping, and tax preparation. See 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. See where every dime goes and make money-decisions you feel good about. See 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 appls. 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 though. It has way too many features to list, but it’s their small business tax support that makes them stand out. Check out Schedule C for Small Business Owners: 6 Tips to Make Tax Time a Breeze.

The Best DIY Tax Filing Softwares

There are DIY programs that can handle small business taxes easily, if you want to try them yourself. They’re not overly complicated and they hold your hand through the entire process. Are they for everyone? No, but they’re fast, credible, and affordable if you want to try the DIY approach.

1) Turbo Tax Business is an easy, step-by-step program. They have options 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. 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. 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 info.

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.

4) When To Call In A Pro

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, you’ll probably need a professional. Check out these common tax professionals to see which one best suits your business needs.

 

BOOKKEEPERS

Bookkeepers aren’t qualified to handle your taxes. They’re not required to have a college degree either, 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’re 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 to become an accountant, the professional must have a bachelor’s degree in accounting or other financial degree. As far as taxes are concerned, accountants can:

  • Prepare and file tax forms
  • Help plan taxes and give advice on certain business decisions
  • Offer audit assistance

 

TAX ATTORNEYS

Tax attorneys are lawyers who specialize in tax law. They may also be called CPAs (certified Public Accountant), 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’re involved in some type of IRS action.

Commonly, tax attorneys can assist with:

  • Filing a lawsuit against the IRS
  • IRS lawsuits against you
  • Business start-ups with complex tax requirements
  • International business and tax laws
  • Criminal IRS investigations against you

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 worst case scenario that can happen when you trust the wrong individual. Ask around and get recommendations from business associates you trust before you hire anyone to handle your taxes.

5) Wrapping Up & 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 start planning now. 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 basic understanding of your obligations to set up a successful system. Don’t overlook this essential piece of your business. You’ve got this!