Understanding Your Tax Burden as a Small Business Owner
February 11, 2015
While it’s not a favorite topic among small business owners, tax season is still the most important time of year. The steps you take before the end of the year can have immediate money-saving benefits, but it doesn’t stop there. The beginning of a new tax year is an excellent time to review whether you are maximizing your deductions, as well as uncover additional ways to save. Minimizing taxes means you get to keep more of the money you earn—not doing so might spell trouble for your bottom-line.
The Different Types of Business Taxes
Income Tax:
While all businesses have federal taxes to deal with, Texas does not impose a state income tax on corporations or individuals. Texas does have a corporate franchise tax based on earned surplus, so that might be something to research further.
Employment Tax:
Any business with employees must withhold the employees’ share of Social Security and Medicare (FICA) taxes as well as pay the employer share of FICA, along with other federal and state unemployment taxes. If you run an incorporated business, you are an employee and owe these taxes even if you’re the only employee. Self-employed individuals generally must pay a Self-Employment “SE” tax (a Social Security and Medicare tax primarily for individuals who work for themselves), as well as income tax–and must make quarterly payments to the IRS for the estimated tax.
Sales Tax:
When you have a business that sells goods or services (and you are based in Texas where we do have a state sales tax), you are required to collect sales taxes on most transactions. While customers technically pay the sales taxes, you will face penalties for failing to collect the taxes and pay them to the state.
Excise Tax:
Depending on the type of business you operate, individual companies may pay excise taxes on fuels, highway usage by trucks, and other activities.
Taking the Right Deductions
Even if you take a “casual approach” to recordkeeping for your personal taxes, you must treat your business with more diligent accounting practices.
1. Track your income and expenses with computer-based recordkeeping solutions.
2. Set procedures to collect and store required receipts and other proof of expenditures.
3. Make policies on certain recordkeeping for employees like how to submit for reimbursement for business-related car expenses, and enforce rules on how they must keep those records.
Tips to Help You Save on Business Taxes
Contribute to Retirement Plans
If your business is profitable, you can use a portion of the income towards a qualified retirement plan that will provide you with a tax deduction for your contributions. If you have employees, you will build employee loyalty by providing this retirement savings opportunity.
Create a Reimbursement Plan
If you reimburse employees for using their vehicles on company business, for example, this can compensate them for business expenses without having to treat the reimbursements as income. This means the refund will not be included in the employees’ W-2 form for these amounts (and save you both on FICA tax payments).
Add to Employee Benefits Instead of Income
One big way to save on taxes is to compensate employees by increasing your contribution to their health insurance costs or flex spending accounts instead of giving them the same amount in salary increases. This also saves both you and your employees on FICA, Medicare, and unemployment taxes.
Consult your tax advisor regarding your particular situation.
Additional Tax Law Resources
American Academy of Attorney-Certified Public Accountants
Members are professionals dually qualified as both attorneys and CPAs
Internal Revenue Service
Small Business and Self-Employed resource on federal taxes
Small Business Administration
Offers a variety of business tax information
State and Local Government on the Net
Directory of state, county and city government websites to find information about state and local sales taxes
The information above was sourced from an Inc. online article written by Elizabeth Wasserman. For more information, read the full article HERE.