For this article, we will take a look at taxes and some of the information that you need to know if you are running a small business. An important caveat: this article is for information purposes only, and you should not rely upon anything written here as legal tax advice. You must consult a qualified tax attorney and CPA before making any tax decisions.
This is key to remember when you are operating a business. You’re the boss now, so the chance that you are paying taxes automatically is zero. Remember, when you are working for someone else, their company takes care of prepaying taxes for you, which is why you see deductions on your paycheck. However, as your own boss, you will be responsible for doing that pesky job.
If you are a self-employed, working for yourself (and not for a corporation), you will be responsible for paying three different taxes each year. These three taxes can be paid quarterly or annually, depending on several factors. Make sure to check with a tax advisor on which option is best for you. The three taxes are self-employment tax, federal tax, and state tax (if your state has this tax). The self-employment tax is a combination of your medicare and social security, which is roughly 13%. This tax is double of what you would normally pay, and that is because you are paying both parts. If you were working for someone else, they would pay half. The federal and state tax are flat rate, based on your earnings for the year.
Suppose you make $1.00 in profit. With this $1.00, you will pay 13 cents towards self employment, 20% towards federal and 5% for state taxes. So now suddenly, all you have left is 62 cents of that dollar after you pay the taxes.
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These are everyone’s favorite part of running a business. First, say you purchase a new computer for your job. You will keep the receipt. Make sure to pay for the item separately and not with anything else. That way, only the computer is on the receipt. So you purchased the computer for $500.00. You have two options available on how to claim this as a business write-off. First, you can claim all $500.00 the first year. Or maybe you only want to claim half this year and then claim the other half next year. This option is also available, allowing you to have the write-off for two years. Make sure to check with your accountant on handling this the correct way.
If you are working in an office and you need office supplies such as pens, paper, boards or anything office related, make sure to keep your receipts as again these can all be claimed as business expenses. Say you are working out of your house, make sure to check with your accountant but there is a percentage that you can write off in regards to your electricity and internet. You may also be able to write off part of your house rent, or part of your mortgage each year, due to the fact that you are operating out of your house. These can be tricky write-offs that can easily garner the attention of the IRS, so I encourage you to talk with your tax accountant.
Yes you can also write off travel expenses, as long as they pertain to your job. For example, say you need to visit a customer in another town away from where you live. Maybe it is close enough to drive. In that case, you could keep your gas receipts for making a claim, along with your hotel and food. If the location is farther away and you need to travel by air, you can keep your plane ticket and receipt to turn into the accountant and take it as a business expense along with your food and hotel.
Say your company operates as some sort of travel operation (or is always using vehicles at work). Here you can keep receipts for your vehicles, such as gas miles, oil changes, upkeep, labor done on the vehicles. All of these as well can be write-offs, along with your insurance for these vehicles. The most important part of this is to make sure that they are work cars and not a combination of both. Once you turn them into your personal vehicle, you lose some of the write-off capabilities.
The above information is to help you prepare as we enter the tax season. Remember everything above is just a guideline, and for all the exact details, make sure to contact a tax attorney and a CPA for all the latest updates from the IRS. Make sure that you are following the rules.
One last note. A good rule of thumb is to keep your business tax returns and also receipts for up to seven years, just in case Uncle Sam decides to pay you a visit (also known as an AUDIT). This will help you to be prepared for the questions that the IRS will inevitably ask during the audit.
Joshua Kelly is a 13-year United States Navy Veteran. Joshua holds a Bachelor’s Degree in Natural Science and Math. Along with several military decorations, Joshua was certified as a Community College of the Air Force Instructor. Joshua is currently self-employed with Dakota Weather Consultants.
“I am passionate about the military way of life and also the self-employed way of the future, and of course, the weather. You will find me, every day, running my weather consulting firm when I am not spending time with my family. I enjoy sharing information by writing to help others prepare themselves and learn from my experiences”. Joshua Kelly