Taxes can be understood as some of the most burdensome responsibilities for a small business owner. Setting aside the right amount of money helps in the smooth running of the operations without incurring any unwanted financial hardship. The business structure, location, revenue and even the eligible deductions are some of the factors that determine how much the business should save. Proper planning minimizes stress and helps in tax compliance ensuring there are minimal penalties or none at all.
Understanding Tax Obligations For Small Businesses
There are several types of taxes that small businesses incur, they include income tax, self-employment tax, payroll tax and even sales tax. The savings for tax obligations depends on the type of business entity. Corporations, partnerships, LLCs, sole proprietors and other entities all have unique tax obligations. There is also a need to incorporate federal, state and even local taxes and their relevance on the savings allocated.
General Rule: Save 25% to 30% of Income
Most small businesses find it prudent and logical to save between 25% to 30% of their income to cover tax obligations. Federal income tax, state taxes, self-employment tax and all their masks fall under this percentage. The percentage may increase if the business is located in a high tax state. On the contrary, some entrepreneurs may have a reduced tax burden if they qualify for certain credits or deductions.
Considerations for Self-Employment Tax
Self-employment tax is of particular importance to sole proprietors and single-member LLCs. The self-employment tax rate is now 15.3%, an amalgamation of 12.4% for Social Security and 2.9% for Medicare. Business owners must remember these taxes on top of self-employment tax, along with federal and state income tax. To be safe, sole proprietors should set aside at least 30% to 35% of net income towards these expenditures.
Estimated Quarterly Tax Payments
If small business owners anticipate owing above $1,000 in taxes, they need to pay estimated quarterly tax payments to the IRS. When using the IRS system, taxes are paid in April, June, September, and January. Not paying your estimated taxes can result in paying penalties. Business owners need to calculate their yearly taxable revenue and divide by four to figure out their quarterly payments. Keeping up with your quarterly taxes means you prevent a large bill at the end of the tax year.
State and Local Taxes
Taxes at the municipal and state levels depend on the location of the business. Some regions do not charge income tax, and others charge steeply. Business proprietors ought to consult their state’s tax agency to gauge what needs to be set aside. Aside from that, sales tax also applies to businesses that offer taxable goods and services, which require precise record keeping and prompt remittances.
Deductions and Tax Credits Reduce Tax Burden
Having tax deductibles ascertains that the business does not have to save as much, this saves a business a good chunk of money. Some of the most common deductibles that can be claimed are office supplies and equipment, travel, marketing, and if you have a home office, a portion of those expenses. These deductibles when maximized do lower the taxes to be paid. Other deductibles like tax credits for employing people or using energy-efficient machinery also aid in saving money. A tax professional gives or denies the claim of credits or deductions and hence gets or saves the business the most money out of taxes ensuring that businesses are not paying more than necessary.
Payroll Taxes for Employers
For businesses that have workers, these businesses should start saving funds for payroll taxes, which is comprised of social security, medicare, federal and state unemployment tax. Employers must deduct these taxes from employee’s salaries, in addition to matching some of them. If there is no saving set aside for payroll taxes, the business could likely face penalties, therefore it is vital that all owners of businesses plan ahead.
Constructing a Tax Savings Plan
Each small business should have a tax savings plan in place. This aids in preventing the financial strain that accompanies tax time. Automating payments into a dedicated tax savings account helps to streamline the savings process. Businesses should also periodically check their tax estimates to ensure they are meeting their targets.
In Summary
Self employed individuals may want to consider saving as much as thirty-five percent of their income while other small businesses may solely wish to set aside twenty-five to thirty percent. This percentage should be tailored to suit each business’s structural form, geographical location, and available deductions. Small businesses can effectively manage their tax obligations and avoid surprises by paying estimated taxes quarterly, tracking their deductions, and consulting a tax professional.
