Top Tax Tips for Home Business Owners
6 Tips to Making Tax Time Go Smoother
Having a home business entitles you tax deductions you don’t get as employee; however, to maximize your savings, you need to know the rules, be organized, and have a system. Here are the top tax tips to making your home business taxes easier.
(Please note, I’m not a tax expert, so please consult a tax professional or the Internal Revenue Service’s website for more information.)
1. Develop a system for managing your income and expenses.
Shoeboxes don’t cut it anymore, especially since technology has made organizing and recording financial aspects of your business easier. Financial software or online accounting track your income and expenses, and usually you can import the data into tax software saving you a ton of time. The biggest challenge to organization is keeping track of receipts. Some business owners like to scan and organize them digitally. Others keep them in labeled files. Another option is to keep a journal, whereby you write down the expense and attached the receipt to the page.
Whatever you choose to manage your receipts, keep up on the process throughout the year instead of waiting until tax time to get them organized.
2. Know your deductions.
For a long time, home-based business owners avoided the home office deduction out of fear of an audit. Fortunately, home offices have become more mainstream and the IRS has relaxed the rules a bit so there’s no reason to fear taking advantage of all the deductions, including the home office one. With that said, you can only take the deductions you qualify for. The home office deduction requires that your home office is used regularly and exclusively for running your business and that it’s the principal place of business.
If you use the corner of a room, you can only consider the square footage of that corner as opposed to deducting the space of the entire room (the home office deduction is based either on square feet of the office or as a percentage of the total square feet of your home). Other home business deductions include equipment, such as a new computer, supplies, services (i.e. Internet access) and travel. Basically, if you have to spend money on something to do business, it’s probably deductible.
3. Don’t forget your start up expenses.
If you started your business this year, you may be eligible to deduct the costs of getting your business up and running, such as buying a permit or setting up an LLC.
4. Track your car expenses.
The IRS allows you to deduct car expenses related to your home business. You have two options; the standard deduction based on the miles you drove or actual car expenses. To take the mileage deduction, you need to keep a record of the miles you’ve driven. If you drove to the office store to get paper or ink, write it down. Keep a little notebook in your car or use a smartphone app. To take the actual expense deduction, you need to track all the expenses the car incurred. If you’re car is used for both personal and business, won’t be able to take all the expenses, so you need to track your business vs. personal use the car.
5. Take care of you and the family.
6. Don’t forget estimated and self-employment taxes.
In a traditional job, your employer takes taxes, social security, and medicare payments out of your paycheck each month. As a home business owner, you’re responsible for making these payments. In the case of taxes, you're required to make estimated tax payments four times a year, instead of monthly. When you do your taxes, you'll also need to pay self-employment tax, half of which is tax deductible, to pay social security and medicare. The easiest way to plan for estimated and self-employment taxes is to put away a little bit of the money you earn into a savings account each time you get paid.
Estimated tax payments are due on the 15th of April, June, September and January. At tax time, you do your taxes as usual. If you overpay your estimates, you’ll get a refund. If don’t pay enough, you’ll owe, and depending on how much you owe, you may have a penalty and fee. You'll pay your self-employment tax when you do your tax return in April.
Taxes can be overwhelming and complicated, but you can make it easier on yourself by having a system to organize and track your income and expenses.