As an entrepreneur, you’re confronted with the same two certainties in life that everyone else faces: death and taxes. Your priest can help you with the former. We’ll take a crack at the latter.
4 Tax Tips to Keep in Mind
Anyone who receives a W-2 from a company is considered an employee of that company and enjoys some of the tax benefits that come with it – namely that the employer pays half of the FICA taxes. But if you aren’t receiving a W-2, or are working for yourself, you’re likely considered an independent contractor.
“The general rule is that an individual 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,” the IRS explains. “The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax.”
While there are many benefits and advantages that come with being a self-employed entrepreneur, or independent contractor, there are also plenty of challenges. Taxes are one of the least desirable topics – but that doesn’t mean you can avoid the issue. In fact, you need to be even more cognizant of what’s happening here, lest you end up paying way more than you already have to.
As you face the issue of doing taxes as an entrepreneur for the first time, there are some important tips and issues you’ll want to keep in mind. Let’s highlight a few of them:
Keep Accounts Separate
If you want to make your taxes and accounting easier later on, make it a priority to keep your personal and business accounts totally separate from one another.
“This is a key piece of advice,” tax attorney Jessie Seaman says. “The business bank statements should be solely used for business expenses, and no personal charges or withdrawals should occur. If business and personal funds are commingled, the owner/shareholders/members could find themselves personally on the hook for business tax debts.”
With a rising number of free online checking accounts for small businesses and entrepreneurs, there’s no excuse for not opening up a separate account.
Set Aside Estimated Payments
As an independent contractor, you won’t have an employer taking taxes out of your paycheck. This means you’ll be responsible for making quarterly estimated payments to the IRS.
If you aren’t careful, you can come to the end of the year and owe a big tax bill and not have the cash to pay it. This is a dangerous spot to be in; you should do everything in your power to avoid this fate.
Regardless of how self-disciplined you think you are, it’s wise to set aside a portion of your taxes in a separate account that you know you won’t touch. You may not set aside the perfect amount, but you can get close by estimating your income throughout the year.
Never Ignore Tax Bill
If you do come to tax season and realize that you don’t have the money to pay your tax bill, don’t just ignore it. In fact, this is the worst thing you can do.
“To keep penalties to a minimum, you should file on time and pay as much as you can when you file,” RISE Credit advises. “If you can’t meet the April filing deadline, consider requesting an extension—but note that an extension of time to file is not an extension of time to pay.”
Hire an Accountant
Every year, people analyze their tax preparation options and weigh cost versus convenience. In other words: to hire an accountant, or not to hire an accountant?
While there are plenty of DIY software programs out there that help people file their own taxes, you’re better off hiring an accountant. You’re going to spend over $100 getting all of the software you need as an entrepreneur. So why not spend a couple hundred dollars more and get the peace of mind and expertise that comes with a professional accountant?
Don’t Let Taxes Trip You Up
Make no mistake, paying taxes is a pain in the rear. Whether you’re a W-2 employee or a 1099 contractor, the IRS code is equally complicated and confusing. You either need to pay an accountant a few hundred dollars to prepare your tax return, or you have to fumble your way through the process and wonder if you’re doing it right.
You’re probably a bit overwhelmed right now, but things will get easier with time. While the tax code likely won’t get any simpler, you’ll start to get the hang of it as the years go by. Before you know it, you’ll be able to accurately estimate your taxes, find ways to reduce your taxable income, and rest easy knowing you’ve done everything in your power to ensure accuracy.
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Currently, Larry writes for Entrepreneur, Social Media Week, CEOWORLD Magazine and the HuffingtonPost among others.
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