Year End Tax Planning for Entrepreneurs
As the end of the year approaches, entrepreneurs need to start thinking about their tax planning. Whether you are just starting out in business or have been in operation for a while, there are steps you can take to minimize your taxes and maximize your financial success.
Here are ten tax tips for entrepreneurs to consider as the year comes to a close:
Review your business structure: Depending on the type of business you have, you may be eligible to choose between different types of business structures, such as a sole proprietorship, a partnership, or a corporation. Each business entity structure has unique tax implications, so it is paramount to understand what is right for your business.
Keep clean records: Accurate and detailed recordkeeping is essential for any business. Keep track of your income, expenses, and other financial transactions throughout the year. Use accounting software or at minimum an excel sheet, but entrepreneurs need to use something besides a shoe box filled with receipts.
Review your withholding: Check if you have withheld enough taxes to avoid penalties or interest. You can use the IRS's Tax Withholding Estimator to determine the appropriate amount to have withheld from your income. If you have a W-2 job and need to adjust your withholding, give your employer/HR an updated Form W-4. Reach out to a CPA or use the IRS website to fill out your employment forms.
Take advantage of tax credits and deductions: There are several credits and deductions that entrepreneurs may be eligible for, such as the Small Business Health Care Tax Credit, the Work Opportunity Tax Credit, and the Self-Employment Tax Deduction. Be sure to research which credits and deductions you can claim to reduce your tax burden. If you are in research and development, think about hiring a specialist that can apply for R&D Tax Credits.
Consider tax planning strategies: Tax planning can effectively minimize your tax liability and maximize your savings. Consider contributing to a retirement or health savings account, claiming deductions for business expenses, or taking advantage of tax-free income opportunities. Tax planning can also be as simple as understanding your projected liability and whether your current withholding covers that liability.
Plan for self-employment tax: As an entrepreneur, you are responsible for paying the employee and employer portion of your self-employment tax. Plan ahead and set aside enough money to cover this tax liability. Obviously, don't worry about this if you are incorporated.
Know your filing deadlines: Be aware of the various filing deadlines that apply to your tax situation. Know the deadline for filing your personal tax return and any deadlines for estimated tax payments or business tax returns. Missing a deadline could result in penalties or interest, so mark these dates on your calendar. A simple google search or talk with your tax professional can reveal these dates. Remember, if you use a tax professional, you will want to know their deadlines to get everything filed timely and correctly.
Organize your tax records: Keeping your tax records organized makes preparing your tax return easier. Gather all your relevant documents, including Forms W-2 and 1099, income statements, and virtual currency transactions. If you've recently experienced a life event that could affect your tax situation (such as getting married, having a child, or buying a home), be sure to keep any relevant documents on hand. If you have questions about what to keep, ask your preparer and look at the tax organizer sent to you every year. Be proactive at finding where to get documents when the year is over. Having the necessary documents ready helps avoid the dreaded emails and calls back and forth. Ask your preparer, employer, or forms provider where you can access what you need.
Check your tax account information online: The IRS offers an online tool that allows you to view your tax account information, make payments, and see any balances or payment plan details. It is a helpful resource for keeping track of your tax situation throughout the year. Give yourself peace of mind and check your tax status with the IRS and your state.
Seek professional help if needed: If you are overwhelmed by your tax situation and how to handle your taxes as an entrepreneur, it may be helpful to seek the guidance of a tax professional. An enrolled agent or CPA can help you navigate the complexities of the tax system and ensure that you are in compliance with all applicable laws.
By following these tax tips for year-end, entrepreneurs can be well-prepared for the upcoming tax season and minimize their tax burden. By staying organized, claiming all available credits and deductions, and seeking professional help if needed, entrepreneurs will be in the best position to succeed in the new year.
