For many business owners, taxes can be a painful experience. The process of preparing and filing taxes can be a stressful, and complicated process for many. The idea of owing money at the end of the year, or the potential of an IRS audit, is not appealing for any business owner. A tax planning strategy can help lessen the blow of tax season, and set business owners up for success. Here’s how to plan around taxes to save time, money, and stress.
The Early Bird Catches The Worm
Or in this case, the early bird can rest assured that their taxes are filed on time. Timeliness is everything when it comes to filing taxes. The earlier they can be filed, the better. Waiting until the last minute to file taxes can cause undue pressure and stress, which is bad for business and the heart. Taxes are due by April 15, if a business in unable to meet this deadline, then a tax extension needs to be filed to avoid unnecessary scrutiny from the IRS.
Stay On Top Of Your Bookkeeping
Bookkeeping is a necessary part of running a business. How much money is coming in? How much money is going out? This is an ongoing process that needs to be maintained on a regular basis. Monthly bookkeeping helps business owners understand their profit, and therefore the taxes that are owed.
Quarterly Estimated Taxes
Business owners and self-employed individuals are responsible for paying estimated taxes. Estimated tax payments make up the withholdings a normal employer would deduct from an employee’s paycheck. Estimated taxes are due April 15, June 15, Sept. 15, and Jan. 15, unless the 15th falls on a weekend or holiday than the due date is moved to the next available business day.
Prior years tax returns are useful in calculating the estimated taxes owed. Simply take the amount paid in federal taxes from the prior year and divide it by 4. This provides a quarterly payment amount. Of course, things might change over the course of a year. Perhaps this year is going to be more profitable or maybe there is going to be a loss. The amount paid in estimated taxes can be adjusted as need be.
In addition to estimated taxes, self-employed individuals will also be responsible for remitting self-employed tax. The self-employed tax is comprised of the employers and employees portion of Social Security and Medicare at 15.3%.
Strategize With A Tax Advisor
Regular meetings with a tax advisor can help businesses create and meet their financial goals. A tax advisor can help with important business decisions such as when to time a big purchase and it is worth pursuing based on the return investment and capital budgeting.
While regular meeting with a tax advisor is encouraged, the best time of year to meet with a tax advisor, other than tax season, is at the end of the year. Before the close of the year, there is still time to make some financial decisions that could impact a businesses tax situation. For example, delaying income until the next year by invoicing clients late, or purchasing a large number of office supplies before the close of the year. The point is to meet with a tax advisor to go over the options before the “ink dries” on the year. This could affect the amount owed in taxes.
SEP IRA’s And Health Care Deductions
A SEP or Simplified Employee Pension plan is a type of tax-deferred retirement savings plan for self-employed individuals and small business owners. With a SEP a small business can make tax free contributions for themselves of up to 20% and each of their employees up to 25%. Some food for thought when it comes to tax planning and SEP contributions:
- Self Employed – For self-employed individuals, contributions to a SEP are pre-tax, therefore lowering the AGI (adjusted gross income), this reduces the tax liability. However, it does not affect self-employed taxes as they are calculated before SEP contributions.
- Small Businesses – For small businesses contributing to employee plans, this increases business expenses, which lowers profit. This helps lower both income tax and self-employed tax.
- Corporations – For small businesses operating as a corporation, contributions to employee SEP IRA plans increase expenses. This lowers net profit within turn lowers the income tax. SEP IRA contributions are not susceptible to Social Security and Medicare taxes. So, corporations do not pay income tax, Social Security, or Medicare taxes on SEP-IRA contributions.
- SEP Contributions and AMT (Alternative Minimum Tax)- Because SEP contributions lower AGI, they could also affect the AMT.
- SEP Adoption Date – An SEP can be adopted and funded as late as April 15 (without extension) and Oct 15 (with extension) for the prior tax year. This allows taxpayers to have contributions deducted from their prior years’ tax return. This is helpful if the taxpayer needs some last minute deductions to help them save on taxes.
Additionally, healthcare expenses can also qualify as deductible expenses. Premiums for self-employed individuals are 100% deductible. There are also some deductions available to small businesses who fund their employee’s health care premiums. Certain stipulations apply. For example, employees must have an average salary of $50k and the health care plan must be purchased through the Small Business Health Options Program (SHOP). There are also some deductions available for additional medical expenses, however, taxes have to be itemized. It is important to talk to a tax advisor to see if it makes sense to itemize or not. Another way health care costs can lower tax liability is through an HSA or health savings account. HSA contributions are made pre-tax, therefore they lower the AGI, which lowers the tax liability.
Tax planning helps business owners better understand the ramifications of their actions, and prepare for the future. Some examples of effective tax planning include: strategizing certain purchases, planning for deductions, and timing income to lower tax liability. The end goal is to save money on taxes. Working under the guidance of a tax advisor can help business owners explore options they never thought of before. To learn more about how to plan around taxes contact one of the tax planning specialists at the Tax Hack Accounting Group.
About The Author: After six years at consulting Fortune 500 companies with tax giant PwC, Miguel left management at the “Big Four” with one goal: to make taxes easier. Since starting Tax Hack, he has built a team fully focused on educating clients through seamless tax preparation and consulting experience.
Miguel is designated by the Internal Revenue Service to represents taxpayers in all matters before the IRS and in the United States Tax Court. He has been featured in the Wall Street Journal, Fox Business, and MSNBC on tax and has testified before the U.S. Congress on tax reform as an expert witness.
When not working with his VIP clients, Miguel is trying to keep up with his 12-year-old son’s soccer games and his 9-year-old daughter’s gymnastics meets (where he can be seen secretly reading tax publications).
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