11-16-2016 According to Wealthy Factory’s Garrett B. Gunderson, 9 in 10 business owners overpay on their taxes regardless of whether or not they pay a high-priced accountant to help. Our complicated and dense tax code weighing in at over 70,000 pages is just part of the problem. A lack of entrepreneurial education on how to maximize your deductions while minimizing your tax burdens is another.
Entrepreneurs may already know about common deductions like writing off part of their rent or mortgage. But they may be missing out on lesser known tax tips that can keep your records organized and put more money back in their business. Here are five tax tips to consider:
Business owners are required to complete the Transmittal of Wage and Tax Statements, or a W-3. According to the IRS, this form is forwarded to the Social Security Administration to reflect your total earnings from Medicare to Social Security and withholding for all employees. This form must be turned in to the Social Security Administration by the end of February, along with W-2 tax forms from employers. Make sure the totals from both forms are equal to ensure your tax records are correct and compliant.
Choosing the wrong entity can cost your business thousands of dollars each year. For example, CPA on Fire recommends an S Corporation if you’re earning over $35,000 per year net income. They assert that you could save $10,000 a year in taxes if you’re earning $100,000 in net income. Meanwhile, if you’re earning less than $35,000 but are concerned with protecting your business and assets, an LLC may be the right choice for you.
There’s more out there than traditional IRAs for entrepreneurs and the self-employed. For starters, the Simplified Employee Pension IRA, or an SEP IRA, is specifically targeted toward entrepreneurs and allows for a contribution of up to 25 percent of your net self-employment income; it also allows for 25 percent of each employee’s pay. Alternatively, entrepreneurs can also explore an individual 401k with higher annual contribution limits than a traditional IRA.
Many entrepreneurs have never even heard of Section 179 of the IRS tax code. This deduction allows businesses to deduct the full purchase price of qualifying equipment and software. For the 2016 fiscal year, that deduction limit is $500,000 and is good for new and used equipment and software. Ask a qualified CPA about Section 179 to ensure the latest deduction limits to maximize your write-off.
Entrepreneurs who buy their own health insurance can write off 100 percent of their deductible on Form 1040 of their tax returns. However, there are some restrictions. For example, you may not be able to take the premium deduction if you were eligible to hop on a spouse’s or partner’s qualifying health insurance.
Business owners who have less than 25 full-time employees paid $50,000 or less a year, pay at least 50 percent of their full-time employees’ premium costs and offer coverage through the SHOP marketplace may also be eligible for tax breaks.
According to an article in the New York Times, the majority of business owners end up having problems in an audit because of poor record keeping and misunderstandings about their taxes rather than actively trying to cheat the system. Invest in a quality CPA who understands the unique business environment of entrepreneurs, no matter how well you think you understand the deductions and tax rules that apply to your business. You’ll end up saving thousands in potential write-offs and save yourself headaches during potential audits or IRS inquiries.