Starting a business is a major accomplishment, especially for new entrepreneurs. However, logistically, the reality can be more challenging than it initially seems. From the funding needed to open your doors to driving adequate revenue to keep your lights on, a lot more goes into self-employment than a great idea.
For many small business owners, the first big hurdle comes at tax time. Filing a business return can be a long departure from a simple Form 1040, leaving you with lots of unanswered questions. Here’s what you need to know about self-employment and your tax planning.
Keep Your Entity in Mind
How you decide to operate as an entrepreneur means more than your brand. It also refers to the entity you choose. While remaining a sole proprietorship is certainly an option, especially for those who pursue freelancing endeavors that don’t require significant capital, like writing or graphic design, others may favor the protection of an LLC, a partnership, or an S-Corp. Be sure to review the pros and cons of the entity forms available to you, including the price and legal requirements that go into incorporation, as well as necessary tax returns and filing deadlines. For example, a sole proprietor can file using Schedule C as part of a traditional 1040, while S-Corp owners must embrace the challenges that lie within a Form 1120S.
As an individual, you file using your Social Security Number, but as a business, you might need a little more. Before you file, you may need to obtain an Employer Identification Number, or EIN. If you don’t have an accounting system in place, now is the time to make that move. There’s no need to invest in sophisticated software – a free program like Mint may be enough in the early days – but be sure your income and expenses are organized and available.
Understand Available Deductions
As an individual, daily expenditures aren’t deductible, but in a business setting, they very well may be. The deductions available to small businesses are quite diverse, giving you plenty of ways to save that you may not yet know about. For example, a home office deduction can reduce expenses significantly for those who carve out a dedicated working space in their homes and, for those who travel by car, mileage can be deductible as well. Before you resign yourself to thousands owed in taxes, familiarize yourself with the options available. While you can’t deduct the cost of pens, pencils, and plane tickets you buy for personal use, you may be able to do so for expenses related to your business.
Consider the Pros
Business tax can seem like an uphill battle, particularly for those who are short on time – or on tax knowledge. If you want to make it through tax season without a hitch, hiring a professional can be an easy way to get things right. A tax accountant can help you track expenses, organize invoices, and ensure you make the most of each and every deduction.
Going into business solo can be a big undertaking, but with a little help, anything is possible. If you want to make tax time easier than ever, the small business experts at Klein Hall CPAs are happy to help. Get in touch today to learn more!