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Record Keeping and Tax Tips for Small Business Owners

March 9, 2022 | By Tim Daly, CPA
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Being a small business owner or partaking in a side hustle can be a rewarding experience. You can be your own boss, have the freedom to work as you please and can provide products and services that you are passionate about. However, with these freedoms also comes additional responsibilities. You must keep accurate records of all the income and expenses of your business and ensure you are paying taxes on time, which can be a daunting task.

At Wealthstream Advisors, we work with several clients that own successful small businesses. To help those individuals and others understand the basics on small business books and taxes, we have put together the following guide.

Income Tax

When you are a W-2 employee, meaning you work for an employer, you receive a paycheck from your employer that is net of withholdings (i.e., federal income tax, state income tax, FICA, etc.). However, when you are a small business owner, your clients will pay you and you are responsible for paying your own taxes and keeping records of your own expenses. Since you are responsible for paying these expenses, and you only pay taxes on your net income, this is a great opportunity to use pre-tax dollars to pay for your business expenses.

Expenses

Some common expense items* that can be deducted for small business are:

Expense Type What Portion is deductible?
Rent 100% for property and equipment
Automotive

$0.56 per mile (2021) and $0.585 (2022) or all-expenses - generally when used exclusively for work

Does not include ordinary commuting from home to office
Advertising and Marketing 100%
Meals 100% in 2021 and 2022**
Education 100% if adding value to business
Employee Salary 100% when paying a reasonable compensation
Employee Medical Insurance 100% when paid on employ’s behalf
Employee Payroll Taxes 100% of the employer contribution
Travel Expenses

100% for business purposes

Does not include ordinary commuting from home to office

 

If you have any questions related to your business, talk to a trusted CPA or financial advisor for advice.

*Please note, this is not an exhaustive list, just some of the more common ones.

**This amount is generally 50%. Under the Taxpayer Certainty and Disaster Relief Act of 2020 a temporary exemptions allows for a 100% deduction for food and beverages.

Keeping it in the family

Would you like it if your kids under the age of 18 could make some tax-free income?

In 2022, you can pay your child/children up to $12,950 (standard deduction) and have it be tax free income to them all while you get the deduction for paying them. No social security, Medicare, or FUTA taxes need to be paid if they make less than the standard deduction and if they meet the criteria below:

  • Younger than 18
  • Doing work related to the business
  • Paid a reasonable wage for their profession and skill level

This income could allow your kids to contribute to a Roth IRA, start saving for college, educate them on being an entrepreneur, and give them disposable money for themselves.

*Please note, if you are a partnership with someone other than your spouse, a corporation or they work for an estate they will need to pay social security, Medicare and FUTA.

Record Keeping, Estimated Payments, and Tax Forms

It’s great that you can use pre-tax money for your business expenses and can deduct them from your profit. This also means it is on you to keep good records, file quarterly payments, and working with a tax professional to make sure the proper tax forms are filed.

Quarterly Tax Payment

When you pay is important. Since the U.S. tax system is a pay-as-you-go system, you could have a scenario where you owe a penalty even though you receive a refund. It is important to make sure that you are paying your taxes each quarter based on your earning in that quarter or in even payments throughout the year based on last year’s tax bill. Be sure to consult with your tax professional and use IRS form 1040-ES to help calculate your quarterly payments. For a schedule of 2022 quarterly payment due dates, check out the IRS website.

It’s also important to note that if you do have a W-2 job and you own a business that you have not made the appropriate quarterly tax payment for, you can withhold extra taxes through your employer and those taxes are accounted for as being paid evenly throughout the year.

To ensure you aren’t being hit with huge bills and penalties, follow the safe harbor rules below:

AGI less than $150,000 Single or $300,00 MFJ

  • Pay at least 90% of the tax you owe for that particular year
  • Pay 100% of the tax you owed in the prior year
  • Owe less than $1,000 in total tax after withholdings and credits

AGI greater than $150,000 Single or $300,00 MFJ

  • 90% of the current year’s amount
  • 110% of the tax shown from the prior year’s return

If you have income that does not include withholdings from an employer, you can make your estimated quarterly payments at irs.gov/payments.

Forms

There are three tax forms that most small businesses will need to be aware of:

  1. Schedule C
  2. Form 8829
  3. Schedule 1

Schedule C

This form summarizes all the income and expenses your business has for the year.

  • Part 1 lists out all the income your business made throughout the year from all sources.
  • Part 2 lists the business expenses for the year. To find taxable income for the year, subtract section 2 from section 1.

You want to make sure that all business expenses go through the business. That’s because you as the taxpayer will only pay taxes on the net profit. When you ensure that everything gets accounted for properly, the income that you report to the IRS should be as low as it can possibly be.

Form 8829

For anyone that uses part of their home or apartment for business purposes, it is important to utilize this form. Form 8829 is where you can deduct all or portion of your home expenses that are being used for business purposes.

If you use a portion of your home or apartment EXCLUSIVELY for your small business, you can deduct that portion of the expense through the business. This includes things like Wi-Fi, electricity, rent and mortgage interest.

As an example – If you use 100 square feet of your 1,000 square foot apartment, you can deduct up to 1/10 of some household expenses that are used for your business. If you pay $100 a month for Wi-Fi, you can deduct $10 each month from your business income and use pre-tax money to pay for it.

Schedule 1

If you have employees, certain items related to your employees will flow through Schedule C while the business owner’s portion will flow through Schedule 1. These items include:

  • Contributions to Retirement Accounts - Individual 401k, SEP IRA, etc.
  • Medical Insurance – Premiums paid on business owner, spouse, or dependents behalf
  • Self-Employment Tax – Employer portion of payroll taxes

Conclusion

Running a small business or having a side hustle can be a rewarding experience. If you have started a small business or are thinking about starting a small business, don’t go at it alone; Talk with a trusted accountant or financial advisor. Always remember: alone we can go faster, but together we can go farther!

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