Taxes: From Unnoticed to Stress
Paying taxes when you buy something, when you get paid, when you pay someone or when you sell something does not seem like a foreign concept. In fact, it’s something that most individuals don’t even think about. As a small business owner, it is important to know what could turn an everyday activity into a stressful situation. Below are 3 tip about basic tax procedures every small business owner should be familiar with.
Know the difference between W2 and 1099
When an individual performs services that are controlled by you and you are the one that determines what will be done or how it will be done, the individual should be classified as an employee. This means that you are required to issue Form W2 which provides a statement that summarizes the amount of money that was issued to each employee. On the other hand, if you issue any Forms 1099-MISC, earnings shown are paid to non- employees and are subject to self-employment tax as well as any state taxes. The IRS says the worker is an independent contractor "if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done."
Tip 1: If issue any Forms W2 at the end of the year, make sure that the information on your employee’s Form W4 is up to date (with correct number of allowances, information, etc.). If you issue any Forms 1099MISC, make sure you are correctly classifying the independent contractor and not misclassifying employees. You risk increased tax bills and penalties for not paying the appropriate employee taxes if you misclassified.
Mark your calendars with important dates
As a small business owner, you need to be keeping track of important tax dates to avoid penalties and unplanned tax bills. Keep in mind that you are not only responsible for your personal tax deadlines, but also your employer tax deadlines if you have active employees or contractors. You can find a free IRS calendar on the IRS website at irs.gov/calendar
Tip 2: If you don’t have important filing dates marked on your business calendar you need to
make a habit of updating the content yearly or subscribing to the irs.gov calendar feed. This can
help you plan for future tax payments and avoid penalties or interest.
Organize your documents
Keeping source documents organized is a vital step to reduce the chances of tax errors and
potential fines. There are multiple ways for doing this, but most small business owners are
finding simple solutions to keep track of all their small business tax documents digitally by using
cloud accounting software like QuickBooks Online or QBO Self-Employed. Remember that some
legal structures, such as the S-Corp, are required to keep proper record keeping of business
Tip 3: You need to make sure that you are keeping track of your business income, expenses and
any business-related transaction. Organize your documents by month and make sure to
separate business from personal expenditures.
Owning a small business always brings unexpected stress but having a basic familiarity of these
tax procedures can reduce the chances taxes will be one of those headaches. Consult your tax
professional if you have additional questions about these procedures or are unsure how to
implement them in your business.
– Erick Rivera