It is said that the only things that are certain in life are death and taxes. While there is little one can do about the former, a little knowledge can be of inestimable help in dealing with the latter. While your best source of information should be your accountant, the following provides some basic but important information throughout this article there are several links you may find useful. Please note that the information presented here is not intended to serve as either legal or financial advice, but merely as an introduction.
Type of Taxes
What taxes you must pay and how you pay them is determined by your type of business. Most businesses are subject to some or all of the following four general types of business taxes.
Income Tax - tax on business income
Self-Employment Tax - tax on your self-employed income
Employment Taxes - tax on the income of your employees
Excise Tax - special purpose taxes
Income Tax All businesses must file an annual income tax return, except for partnerships, which file an information return. Which tax form you use depends on how your business is organized. Refer to www.irs.gov/businesses to find out which returns you must file based on how your business entity was established.
Federal income tax must be paid as you earn or receive income during the year. You must typically withhold income tax from your employees' pay. Estimated tax payments may be required if you do not pay your tax through withholding or have not paid enough tax that way. You may pay any tax due when you file your return, if you are not required to make estimated tax payments. For additional information on payments, refer to www.irs.gov/businesses
Estimated Tax Generally, all businesses must pay taxes on income, including self-employment taxes, by making regular payments of estimated tax during the year. For additional information, refer to the IRS article on Estimated Taxes.
Self-Employment Tax Self-employment tax is a social security and Medicare tax primarily for individuals who work for themselves. Self-employment taxes contribute to your coverage under the social security system, which provides retirement benefits, disability benefits, survivor benefits, and hospital insurance benefits. Generally, you must pay Self-employment tax and file Schedule SE (Form 1040) if your net earnings from self-employment were $400 or greater. There are, however, certain exemptions for people employed by churches.
Employment Taxes If you have employees, you as the employer have certain employment taxes that you must pay and forms you must file. There are several types of employment taxes. They include the following: Social security and Medicare taxes, Federal income tax withholding; and Federal unemployment (FUTA) tax. For additional information, refer to the IRS article on Employment Taxes.
Excise Tax You may also be required to pay excise taxes or submit specific forms if you do any of the following:
Manufacture or sell certain products.
Operate certain kinds of businesses.
Use various kinds of equipment, facilities, or products.
Tax Deductions Knowing which business expenses are tax deductible can have a profound affect on your business' viability and on your personal income. Businesses benefit by maximizing those expenses that are legitimately tax deductible. Typically, expenses that are considered helpful, legal, and appropriate to operating a business are deductible. For example, car expenses, business-related entertainment expenses, business-travel expenses, and home-office expenses are considered by the IRS as ordinary and necessary costs for conducting business.
For car expenses, deductions are calculated using either the standard mileage method or the actual expense method. The preferred practice is the standard mileage method because it requires less record-keeping and is simple to compute. During the first half of 2008, the rate was 50.5 cents per mile. Effective July 1, 2008, the IRS increased the deduction to 58.5 cents per mile. In contrast, the actual expense method generally results in a higher deduction yet requires detailed reporting on the operating costs of the vehicle. Examples of deductible costs include gas and oil, repairs and maintenance, license fees, insurance, tolls, car washing, and depreciation. When the car is also used for personal use, the actual expense is multiplied by the percentage of business use. Both methods require logs showing mileage and purpose of the business trip.
Currently, only 50% of expenses for entertaining clients for business purposes are tax deductible. Suitable entertainment includes sporting events, theatrical performances, music concerts, restaurant dining, and inviting customers to your home. In case of an audit, proof is required delineating that the entertainment expense was related to the business. Therefore, keeping a guest list and noting the business relationship of each person is essential. However, expenses for entertaining employees and their families are 100% deductible and can be non-business related.
Business travel expense deductions apply strictly to the business traveler. Hence, if other non-business guests join the trip, the additional expenses incurred are not tax deductible. Any activities unrelated to the business activity are also not deductible unless the stay was extended for a discounted airfare such as the "Saturday overnight" requirement. In this case, the hotel room and meals would be 100% deductible.
The home-office deduction applies only if the office area in the home is used strictly for business activities and not personal activities. The home-office deduction entitles a percentage of rent or mortgage fees and other expenses such as utilities, insurance, and remodeling to be deducted.
Your knowledge of which business expenses are tax deductible will greatly influence your income. To lower your taxable profit, learn to maximize your deductible business expenses.
In addition to your accountant, the following links may be useful in answering specific questions:
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