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Whether you’re self-employed, running a small business, or just employed by a small business, you may have to consider taxes. Here are five things you should know about small business taxes.
1. You’ll need an Employee Identification Number
Every business must file for an Employee Identification Number (EIN). An EIN is like a social security number for your business. You’ll need it to file taxes, open a bank account and hire employees. At first glance, this may seem like a hassle, but it’s pretty simple. Luckily, the IRS provides an easy-to-use form on their website that takes less than five minutes to complete and submit.
2. Consider your tax liability before you get started
Before getting started, you should understand what taxes are necessary for your business. As a small business owner, there are various taxes you need to pay.
If you have employees, there are additional taxes, including federal income tax withholdings and Social Security and Medicare taxes, withheld from the employee’s paycheck and matching amounts due from the employer. Be sure to set aside enough money each month to cover these costs when they are due.
3. Your income taxes don’t tell the whole story
It’s also essential to understand the difference between income tax and business tax. Income tax is what an individual pays on their earnings, while business tax is the tax on the profits of a business entity. This distinction matters because many entrepreneurs underestimate their income for tax purposes due to misunderstandings about how these taxes work.
4. Why do you need to pay estimated taxes?
The IRS requires you to pay taxes as you earn or receive income during the year, either through withholding or estimated tax payments. If the income tax withheld from your salary or pension is not enough, or if you receive interest, dividends, capital gains, rent, or self-employment income, you may have to make estimated tax payments using Form 1040-ES. Estimated tax is used to pay income tax and other taxes such as self-employment tax and alternative minimum tax.
5. If a business expense is allowable, you can write it off
So, if you want to write off those expenses that occurred while running your business, the bad news is that there are a lot of rules. The good news is that as long as you follow those rules and keep accurate records, the IRS allows businesses to deduct “ordinary and necessary” business expenses from their taxable income. That means you can deduct expenses from your taxable income to reduce the amount of tax you owe.
If you want to keep more of your small business’s money, you need to pay estimated taxes. You may be surprised at how much these taxes can add up over a year. If you’re a sole proprietor, they’ll eat up more than a third of your income if you don’t pay them on time. Consider getting advice from industry experts like Tax Preparation Services in Denver, CO.