Small businesses, welcome to Uncle Sam’s favorite time of year! Though it may be Uncle Sam’s favorite, tax season is often less than anticipated with entrepreneurs, especially if you’re new to filing taxes for a business. How soon do I need to start hanging onto receipts? How should I tax my LLC? What can I deduct as a business expense and how do I classify my employees? The answers to all four of these questions and more can be found below.
1. Plan your LLC tax structure
Keep the number of owners you have in mind to better clarify this area. As stated on the IRS’s website, an LLC can be classified and taxed as a sole proprietorship (single member), partnership (multi member), or a corporation (single or multi member) for federal tax purposes. Domestic LLCs with one owner are treated as a sole proprietorship whereas those with two or more owners are classified as a partnership, unless they have elected to be treated as a corporation.
2. Know what you can deduct
If you’re new as a small business, you want to save money any way you can. For many entrepreneurs, this means deducting as many expenses as possible. The golden rule for deductions is that they must be ordinary and necessary, i.e., anything that is extremely common in your line of work and also appropriate for what you do. Do you use your car for your business? Keep your mileage in mind when filing your taxes. Bought new computers this year? Very few companies can argue against how necessary these are in our work lives so that definitely counts! Traveling for business is another great deduction area. You can take care of plane tickets, taxis, hotels, meals, and even tips.
3. Watch how you classify your employees
One question that comes in to play around tax season is defining the people who work for your company. Are they employees or independent contractors? Generally speaking, employees have a few things that they have a right to: worker’s compensation, unemployment insurance, at least minimum wage, overtime pay, and payroll taxes. If the roles aren’t clearly defined from the start and you mislabel your employees and independent contractors, the IRS could see it as an attempt to avoid paying payroll taxes. This can lead to penalties and back taxes, so be mindful to how you’re labeling those who work for you.
4. Keep track of paperwork and receipts all year long
This will help more than just during tax season. If you create the habit of good organization early on as a business owner, it will improve your career as an entrepreneur all together. But for tax season, it’ll help the process along if you’ve kept all your important, relevant paperwork in one place and saved each and every receipt that came your way. Alongside hard copies of paperwork, create electronic copies like an Excel spreadsheet detailing your expenses with accompanying dates made for the year. This will help you keep better track of all your possible deductions, and won’t hurt to have on hand in the event of an audit.