Most people dream about being an entrepreneur and setting their own hours, having the freedom to do what they want, and building their own business instead of someone else’s. While a lot people do break the daily grind and open their own businesses, some may not be sure how to manage their finances when tax time rolls around. Before taking that leap of faith into entrepreneurship, consider the following important tax tips for self-employed business owners.
As an entrepreneur, filing status is probably the most important factor at tax time. Entrepreneurs can file as a sole proprietor, partnership, LLC or corporation. A sole proprietor needs to file a Schedule C and will be responsible for paying all self-employment tax. This includes Social Security contributions and Medicare.
In cases of partnerships, business owners can file as a partner or as a corporation. While partnerships do need to file returns, they usually do not pay federal tax. In this case, business owners use a Form K-1 to report their individual portion of income to the IRS.
When it comes to filing taxes, in addition to having a tax identification number, self-employed business owners also need to maximize their deductions.
To make the most of deductions, accurate logs of all transactions, including business miles, must be kept. Record initial odometer readings and then record again on a quarterly basis, if tax filing is done on a quarterly basis. In addition, the actual expenses that can be claimed also need to be recorded.
Utilize Tax Preparation Software
One of the biggest mistakes new business owners make is not using tax preparation software. It’s far too easy to lose track of important receipts and other important tax information, especially as a new business owner. Investing in tax software takes the guesswork out of filing and protects against penalties and fees for inaccurate tax filings.
For example, when it comes to the company car, deducting mileage, fuel, tolls, and maintenance costs is allowed. However, there are limits. If the vehicle is classified as a luxury car, the limit may be lower. A qualified tax advisor can discern what’s allowable by law. Self-employed entrepreneurs can also deduct for office supplies and furniture, travel expenses, meals and advertising costs and materials and clothing, if it’s a uniform.
Deciding to leave the security of a W2 and embrace entrepreneurship should never be made in haste. The best way to determine if it’s the right choice is by possibly starting a side hustle to see if it works. If it does, understanding how to file taxes as an entrepreneur makes the ride a lot smoother.