How Do I pay Taxes on my Business?
You now are the owner of your own business.
You have a business name, a tax ID number for the state and an EIN number
for the IRS. Now how do you figure out how to pay your taxes?
Uncle Sam always wants
his fair share so the plan is not too hard. First you need to keep good
records of every dollar you make in your business and every dollar you
spend in your business. I HIGHLY recommend a separate checking account,
debit card and credit car that is only used for your business. In your
checking account you want to deposit every sale, whether cash or credit
card or paypal. Be sure to label in your checkbook register what the
customers name was for that deposit. Keep a written receipt of that sale
as well. For every expense for your business, use only your business
checking account or debit card or credit card. Keep receipts for all
At the end of each
month after you have paid all your bills for the business you can take out
a personal draw and pay yourself. You do not take taxes from this. Simply
write yourself a check and enter it in your checkbook as owners draw. That
is the profit on your business. In the beginning of your business you may
not have any profit or you may choose to keep it in the business to buy
more products or use for advertising or other business expenses. The
owner’s draw is not an expense but rather just a way to take out your
owner’s equity of the business.
A good soft ware
program will help you track all of your finances. You can use Microsoft
Money, Quicken or QuickBooks. There are also other good ones out there.
The main thing is to enter in your income and expenses and print a monthly
report. At the end of the year print a yearly report too. This program
will give you most of the numbers you need for taxes.
You may have other
expenses for your business that were either paid out of your home account
(not a good idea) or on a credit card or that you paid cash for. (PLEASE
DO NOT PAY CASH for business expenses. IRS wants a paper trail.) Enter
those in your software program too. IRS prefers to see a clear separation
of business money and home money.
Remember things like
travel expenses, your Internet Service Provider if you have an online
business, long distance, ink for your printer, a second phone line to run
your online business, postage, printing, etc.
Another big deduction
is the miles you travel in your car for your business. Keep a log in your
car listing the miles on your car on January 1 and on December 31 of each
year. List each day you drive where you went for business and how many
miles it was. The yearly deduction for miles varies from 32-37 cents a
mile so this deduction adds up. I learn to plan some business activities,
purchases or contacts whenever I am out driving. (you can also deduct
volunteer miles (church, scouts, PTA, etc at 15 cents a mile on your
personal taxes - not business).
Remember to keep track
of all the products you donate for advertising, prizes for contests,
samples, etc. You want to deduct those items at your cost. Also deduct any
bad debt, bounced checks, returns and bank fees. And printing, postage,
advertising, internet connection, web page hosting, office supplies, etc.
If you carry inventory
of products then at the end of the year you need to take an inventory
count of what you have on hand. If this is your first year in business
then your opening inventory would be 0. If you had inventory at the end of
last year, then that becomes your beginning inventory this year. You count
inventory by your COST. If you carry inventory you can deduct the space of
the room where you keep them (as a home office deduction-even if the room
is used for other things).
For your business you
will fill out a Schedule C on your federal taxes. On that form you will
gross sales (income) for the whole year minus
cost of good sold (inventory bought) PLUS
inventory at year end minus
mileage expenses will be figured on another form and then entered on your
schedule C as a dollar amount.
If you have profit at
the end of this form you will enter that number on the front of your 1040
Tax form (which will increase your family income). You will also have to
figure the self-employment tax on that profit. If you have a loss on the
Schedule C then that negative number is entered on your 1040 Federal form
(which reduces your family income). Then as you complete your 1040 Tax
form you figure your taxes due for all your family income. This way Uncle
Sam gets taxes on your business income.
I personally like to
use software like Tax-Cut or Turbo Tax Home Business to figure all this
out. It makes it easy and asks you all the right questions for your tax
forms. You do still have to have the income and expenses numbers for your
business and the mileage numbers.
If you owe more than
$500 in taxes after all this, you may be required to do quarterly tax
payments the following year for your business. Be aware to watch for that.
You can do voluntary quarterly payments if you are making profit too.
Figure 15-28% on federal depending on your tax bracket.
If you live in a state
with a sales tax (I do not) then you will probably have another form to
complete yearly or quarterly for all the sales you make and sales tax your
collect to your customers in your home state.
Remember IRS wants you
to make a profit in 3 out of 5 years. If you do not make a profit this
often then they may not let you take the business deductions - counting
your business as a hobby instead of a business. Make sure you make your
business look like a business. Get business cards, business license,
advertising materials, EIN etc.
am not a tax account or CPA. I am simply a business owner. So please make
all tax and legal decisions with the help of a professional. You may want
to hire a bookkeeper or accountant to check things over when you are done.
And that would be a write-off too.
This article was written and copyrighted by Kay Green