We have seen businesses waste time and money by being unorganized for tax season. Have you spent numerous hours/nights trying to get your numbers ready for the tax season? Being unorganized brings on stress and a heavy preparer/tax bill. Sometimes when getting your information in order at the last minute, you might forget a deduction that happens earlier in the year. If time doesn’t allow you to organize the tax information during the year, it might be best to hire help throughout the year. This will save money and stress during tax time. This blog is for any taxpayers that are not organized or don’t know what form to use for which business statues their business entity is.
What forms to file?
Sole proprietorship and single-member limited liability company (LLC) file taxes the same way on their personal taxes (Form 1040 & Schedule C). Partnership and multi-members LLC use forms 1040, 1065, and Schedule K-1. C corps must use form 1120. S corps use form 1020S and Schedule K-1. Why is knowing the required form so important? The different forms for each status have different requirements and therefore the different forms. For example, you would think that all LLCs should use form 1065 and Schedule K-1 but single-member LLCs are treated as a sole proprietorship in the IRS viewpoint. The single-member LLC claims tax income or loss on their personal taxes but the difference is that the single-member LLC’s personal assets can’t be touch if there is a lawsuit against them while sole-proprietorship personal assets are fair game.
What taxes if any does a small business need to pay?
Self-Employment taxes are the majority of the taxes one should expect to pay. This includes Social Security, Medicare, and personal income taxes. Having a professional tax preparer to calculate Social Security and Medicare taxes is a must. These taxes are difficult to calculate by hand. The professional preparer would be able to accurately calculate these taxes with their professional tax software. It is important for a small business to have clean books when tax season comes. Cash is king for small businesses and you don’t want to have to pay more taxes than required.
Number one cause of overpayment for taxes?
There are many factors why a business might overpay their taxes. A couple of leading causes are the following: Loss of receipts, misclassification of expenses, and confusion/lack of information. However, if misclassification expenses have been happening in your books for a long time, it can be difficult to untangle and correct. A survey said that 1/3 of business owners think they overpay taxes and could claim more deductions and credits. These businesses do their own bookkeeping themselves and hoped to save money, instead of paying a professional. However, in the long run, they end up paying more taxes by doing their own bookkeeping instead of having a professional take care of their books. Here is an interesting read regarding the survey: https://wtop.com/business-finance/2018/09/one-third-of-small-business-owners-think-they-overpay-taxes/
Small businesses being tax ready before tax season end up saving more money on taxes and on their tax preparer bill. We would recommend for small businesses that don’t have knowledge in accounting or taxes to hire a professional. Yes, the small business might be worried about the month to month cost, but the cost-benefit outweighs the stress of getting your books tax ready and accurate. We hope that everyone is ready for this upcoming tax season, especially the number of changes that are being implemented this tax season.