Taxes for Entrepreneurs: Your Complete Guide
Being an entrepreneur is not for the faint of heart.
Building a business from the ground up comes with exciting perks, such as being able to choose your work hours and run your business from anywhere…
…as well as with a long list of responsibilities, including paying your business taxes.
(If you’ve ever Googled “do entrepreneurs pay taxes,” the answer is yes!)
When you’re an employee, taxes are rather simple. Your employer deducts a certain percentage from your paycheck and you don’t have to worry about having to do anything else except filing your annual income tax return.
Filing taxes as a business owner is significantly more complicated because it’s now your responsibility to figure out when, how, and what amount to pay the government.
In this blog post, you’re going to learn how to file taxes as a small business owner. We’re also going to go over how to take advantage of different tax benefits for entrepreneurs. Get comfortable and let’s get started.
How to File Taxes as an Entrepreneur: Everything You Need to Know
Choose the Right Business Entity for You
There are different types of legal entities you can register to run your business.
Each type of entity is taxed differently, so it’s important to choose a structure that makes the most sense for your business.
Sole Proprietorship
Sole proprietorship — also called a sole trader — is the default business entity if you run an unincorporated business.
When you’re a sole proprietor, you pay personal income tax on your business profits.
Many small businesses start out as sole proprietorships and transition to a limited liability company or a corporation as they grow.
Partnership
A partnership is a legal arrangement between two or more parties to operate a business and share its profits. Partnerships don’t pay income tax and it’s the partners who bear the tax responsibility.
Limited Liability Company
Also known as an LLC, a limited liability company is a business structure that protects its owners from personal liability for the company’s debts and liabilities.
An LLC is typically treated as a disregarded entity for federal tax purposes. This means that the owners of the LLC — also known as its members — pay self-employment taxes as a part of their personal income tax return using a Schedule C.
Members of the LLC can also elect to have their limited liability company be treated as a corporation for tax purposes.
S Corporation
Similar to an LLC, an S Corporation also protects you from personal liability. The IRS taxes S Corps as pass-through entities, which helps avoid double taxation.
To file your S Corp taxes, you’ll need to file a Form 1120S that produces a Schedule K1. The owner of the S Corporation uses Schedule K1 to report business taxes with their personal tax return.
C Corporation
In contrast with an S Corporation, a C Corporation pays corporate income tax on its income, after offsetting income with losses, dedications, and credits.
Shareholders get dividends from the after-tax income, which they then pay personal income taxes on. This is also known as double taxation.
At first, it can be confusing to decide which legal entity is right for your business.
Consulting with a tax professional is a great way to make sure your chosen business structure will benefit you during tax season.
2. Get Clear on Your Tax Responsibilities
As an entrepreneur, there are a few things you need to remember to do on a regular basis to stay in good standing with the IRS.
Issuing 1099-NECs: Any contractor or freelancer for whom you paid $600 or more for their service must be issued a Form 1099-NEC. This includes designers, social media managers, and any other independent creatives you’ve collaborated with.
Issuing W-2s: Similar to a 1099-NEC, you must issue a Form W-2 to report the wage and salary information of your employees to the IRS.
Staying on top of tax deadlines: It’s your responsibility to know when and how to file your business taxes. Falling behind? You can file a business tax return extension to give you more time to work with a tax professional.
Knowing what your tax responsibilities are ahead of time is key to success during tax season.
3. Take Advantage of Tax Deductions
A tax deduction is a write-off established by the IRS to lower your taxable income…
…and way too many entrepreneurs don’t take advantage of all the deductions available to them.
Popular tax write-offs for entrepreneurs include:
Home office expenses, including mortgage interest, utilities, and repairs. Your home office can be any portion of your residence that you use solely to conduct business.
Business expenses that are “ordinary” and “necessary” to the operation of your business. These deductible expenses can include marketing, website costs, fees for legal services, and more.
Travel expenses if you’re traveling for conferences, seminars, and other events with a business purpose. Commercial use of your personal vehicle can also qualify for the business travel deduction.
Retirement savings when you put money toward your traditional IRA.
Health insurance premiums, including dental and qualified long-term care.
Just like it is necessary to pay taxes as an entrepreneur…
…there are so many opportunities to deduct the cost and save money — you just need to make sure you know which ones you qualify for.
4. Create a Financial System
When you are your own boss, it can be challenging to look at your business revenue as distinct from your personal finances.
(This is why it’s important to keep your business bank accounts separate from your personal ones.)
One of the most important steps to tax planning for entrepreneurs is figuring out the best way to pay yourself.
Whether you pay yourself a salary or get dividends from your business income, it’s important to do it in an organized and consistent way. It’ll save you a lot of time and headache during tax season.
Have a hard time keeping track of all of the numbers in your business? Monthly bookkeeping helps you get the objective information you need to make strategic and profitable decisions.
5. Stay One Step Ahead of Tax Season
Overwhelm and tax season don’t mix.
Preparing to file your taxes in advance is the best way to make sure that everything will go smoothly.
Here are some things you can do to keep your books organized all year round.
Keep track of your revenue and expenses. Investing in quality software like QuickBooks makes bookkeeping much more seamless.
Schedule time for regular financial reviews to make sense of your numbers and use them to inform your business decisions.
Invest in a bookkeeper & tax professional. Even the most robust bookkeeping technology is meant to be used together with a human being.
Desi Tax offers monthly bookkeeping and tax filing services for entrepreneurs and small business owners. Learn more about our packages to stay on track with your tax responsibilities all year long.
Learn more about our services here!
