When they first enter the world of business, a lot of people dream about being one of those wall-street tycoons, sitting in their million-dollar penthouse making calls based on their gut-feeling that never goes wrong. Then the reality hits and they realize that before they get to this point, they must first handle a myriad of tasks they never in their life believed they would be in charge of. In short, they become a DIY person responsible for sales, communication, marketing, strategic planning and much more. None of these tasks, however, is more important than the way in which you handle your taxes. With this in mind, here are several basic things you need to know.
1. Know your company type
Before you even start, it is important to know that, in general, there are three major types of businesses (which are not corporations): sole proprietorships, partnerships and limited liability companies (LLCs). The type of your business determines what formula (Schedule) is used to calculate your profit. For instance, sole proprietorships go under Schedule C (Profit or Loss for a Small Business), while their counterparts follow different schedules. In other words, it is extremely important that after you have established the type of your small business, you find out how each of these types pays their income taxes.
2. Quarterly estimated tax payments
Another thing you might not be aware of is that as a business owner you are not just a face in front of a company but also a self-employed individual. As such, it will be your duty to make estimated tax payments for every quarter. In order to avoid being subjected to penalties, you need to make sure that you have submitted at least 90 percent of all taxes that your business owes. In order to get off on the right foot, you might want to get your last year’s income and tax credits. This will help you calculate your expected tax burden much easier, as well as minimize the chance of making a mistake.
3. Startup expenses are deductible
Another thing you might not be aware of is the fact that most of the startup expenses are actually tax deductible. For instance, any money you have invested towards product analysis or market research might be deductible. Apart from this, you can also deduct the money invested in order to train employees or attend industry-relevant events on your own. On the other hand, if you plan to list licensing fees as deductible, you need to submit them as incorporation and not startup expenses. This, in particular, is a mistake that numerous inexperienced DIY accountants tend to make.
4. Schedule a consultation on tax returns
When it comes to the issue of taxes in general, there is probably no notion more important than the one regarding tax returns. This is probably the one thing you do not want to do on your own. Luckily, many reputable accounting companies are offering professional consultations regarding tax return, which is a low-cost-high-reward option. Just going on a preliminary meeting may grant you a free piece of advice or a quote you would otherwise be unaware of. Such a course of action is especially advised if this is your first year filing tax returns.
At the end of the day, there are a lot of factors which depend on the specific type and the industry of your startup, as well as the exact expenses you had to undergo in order to launch your company. This is one more thing that makes things incredibly complicated for layman accountants. Nonetheless, handling this year in and year out, you will get the hang of the basics, which will make both your job and your efficiency much simpler. Once your business becomes big enough, you might even consider having a professional accountant on your retainer or outsourcing these tasks to an accounting company.