While there are many different kinds of small businesses, they all have one thing in common: taxes. From income tax to sales tax, remitting the money you owe the government is a necessary cost of doing business. And it’s critically important to set up a system that helps you do so accurately and in a timely manner or you might risk owing penalties and interest on top of your tax liability. Use these five tips to avoid costly mistakes.
- Understand your obligations
Depending on a variety of factors, including location, industry sector, form of business organization, number of employees, products and services sold and other factors, your business may be responsible for paying or collecting and remitting a number of taxes, including:
- Payroll taxes and withholding
- Self-employment tax
- Business income tax
- Sales tax
- Local or municipal tax
Be sure you understand the types of taxes your business will owe. A certified public accountant (CPA), your regional Small Business Development Center (SBDC) or your state economic development authority are all good resources to help you understand the different types of taxes you may owe.
- Keep good records
Once you understand the types of taxes you need to remit and where they need to be paid, you can set up a record-keeping system that will help you track what you owe. For example, you’ll need to deduct federal, state and local taxes from employee payroll checks. Even if you don’t have employees, you may owe self-employment tax on your own pay. You may need to collect an additional amount in sales tax on each transaction and pay that to the state. To do so, you’ll need to understand tax rates and payment records and track the taxable amounts in each budget line.
If record keeping is not your strong suit, engaging the services of a bookkeeper can be invaluable in keeping your records organized and ready for tax time. You might also consider investing in bookkeeping software, such as QuickBooks or FreshBooks.
- Avoid commingling funds
Commingling funds means mixing business and personal funds, such as using business funds or credit cards to pay personal expenses. Doing so could cause your records to be inaccurate, and tax authorities may also disallow certain deductions if you pay for them with personal funds. To avoid commingling funds, keep separate personal and business accounts, including checking, savings, lines of credit and credit cards, and pay for purchases and expenses from the appropriate accounts.
- Pay yourself
While paying yourself a low salary or making more purchases to increase business expenses might be a way to reduce your tax burden, it may come at a cost. If you need to qualify for a loan for your business, underpaying yourself or having a high expense ratio could hurt your ability to qualify for your loan. Work with your accountant to determine the appropriate amount to pay yourself based on what the company is earning and create a budget for business expenses—including self-employment tax—that allows you to invest in the business but show strong financials, too.
- Stay on top of tax law changes
Tax laws, withholding rates, deductions and other tax regulations are subject to change. Failure to adapt to these changes could result in fines and penalties if your calculations and payments are incorrect. Another reason to work with a CPA or bookkeeper is that either can help you stay informed about such changes, make appropriate adjustments and ensure that you’re paying the right amount.
By learning about the taxes your business may owe, you can build a system that ensures your business complies with current tax law. Keeping good records helps strengthen your company’s financial systems as well.
Set up an appointment today with an M&T Business Banker to discuss your business and financial goals and visit M&T Bank’s Business Education Center for more information on building your business.
This content is for informational purposes only. It is not designed or intended to provide financial, tax, legal, investment, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.