What to Know Before Doing Your Taxes This Year
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Amy Northard on All Your Small Business Tax Questions Answered
Tax season is quickly approaching, and most of us dread the whole process. Thankfully, this episode features CPA for creatives, Amy Northard, who is dishing out TONS of amazing advice on taxes and what you need to know before you file. Get some of your tax questions answered, learn how you should be filing for your business, and so much more!
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Her Entrepreneur Journey
When Amy was in high school, her dad recommended she take accounting classes. She had some great teachers and fell in love with the structure and small business side of it. She went on to take accounting in college, where she had some wonderful teachers again. She did her first internship in tax, and loved the structure and processes. She knew focusing on taxes wouldn’t require her to travel, and since spending time with family is so important to her, she knew it was a perfect fit.
Amy worked at a public accounting firm for a few years and got her CPA license, before having what she called a quarter life crisis, where she realized she wasn’t enjoying the work and the people. She wanted to keep doing this type of work but work with people that inspired her. She decided to take a non-accounting related part-time job so that she could focus on building her current business working with creatives on their taxes. After about a year and a half, she knew she had to go full-time in her business, and she’s been successfully doing that for the last 8 years.
What are the different ways to set up your business and how does it affect taxes?
There’s a Sole Proprietorship which means that the day you open your business, you don’t have to do/file anything. If you’re a freelancer, you’re probably a Sole Proprietor. When this is your business model, you file a form called a Schedule-C, along with your personal taxes, and then you pay the tax yourself as the individual.
The next level up is an LLC. This is something you register for in your state, and it’s can benefit you a little more by providing legal protection, separating you from your business. From a tax perspective, if you’re a single person in your LLC, then nothing changes and you’re still taxed as a Sole Proprietor. The only difference is that some states may have a few additional taxes or additional fees for becoming an LLC.
The next option is an S-Corporation. This is essentially an LLC that’s taxed as an S-Corp, and requires you to file a form with the IRS that you’re an LLC that wants to be taxed as a Corporation instead of a Sole Proprietor. This is where things would be very different. You have to file a completely separate tax return for the business, and are required to pay yourself a reasonable salary. A lot of people think they need to do this quickly because it’s a great tax benefit, but you should probably do this only if you’re making over $50,000 in profit. The reason for this is that if you don’t have much left over in profit after paying yourself payroll, then you won’t really get a tax benefit from being a S-Corp.
You don’t need to worry about becoming an S-Corp unless you’re making at least $50k in profit.
How often should you file your taxes as a business owner?
There are a couple different types of taxes - sales tax and income tax - and a lot of people get these confused when they hear about quarterly taxes. If you hear quarterly taxes, it’s in reference to paying in your income taxes. If you’re in a state that requires sales tax, then you should have a sales tax account, and logging into that account should tell you how often you pay those in (monthly, quarterly, or annually).
Income tax is the thing due on April 15th that everyone’s familiar with. You’ll file the annual return once a year, and if you’re an S-Corporation or a partnership, your annual return is actually due by March 15th, which is one month before your personal taxes would be due. The quarterly taxes you hear about is not actually filing your taxes - you’re sending in a deposit towards your year-end taxes. It’s kind of like if you were working for someone else and they were withholding those taxes throughout the year. As small business owners, we have to withhold it and send it in ourselves.
What are a few deductions business owners can take that you see them forget?
One of them would be a cell phone. Obviously, you probably don’t use your cell phone 100% for business, but if you use it a lot for calling, you can add up all the minutes you talked on the phone for business and use that as a guide, so you can deduct that percentage. When it comes to data, it’s almost impossible to figure out, but you can estimate how much you use your phone for business and deduct that. Just make sure you’re being reasonable. Don’t say 90-100%, but 50-75% is more realistic.
Your home office is another deduction you can take. Just make sure you’re deducting a reasonable amount of your home, and that the space is exclusively used for business and regularly used. It can’t be your couch or kitchen table where you work from your laptop. It has to be a space not used for other thing. You can also deduct portions of your internet, home repairs, electric, housekeeping, etc. Anything that directly affects your home office space can be deducted.
When it comes to your vehicle, there are two different methods for deducting it for your business. You can download an app like MileIQ and track your miles, and then deduct what you use for your business. The other option is a little more involved, and requires you to both track your miles and keep all of your car-related your receipts. Then you can deduct a percentage of your total car expenses. Sometimes one option will be much better than the other, but choose the one that you’re actually going to be able to keep up with.
Lastly, self-employed heath insurance is something that people miss. If you’re not an S-Corp, it’s not a business expense directly, but it does reduce your taxable income on the personal side of your taxes. If you don’t have health insurance through another person, and you’ve gotten health insurance premiums yourself, you get to deduct those. It can be a pretty big deduction that people often forget.
What do you actually need for taxes? Do we need to keep all the receipts?
Most CPAs won’t actually ask for your receipts. You should keep them all just in case you get audited, but don’t actually need to organize them or need them at tax time. You do need to keep them all! If you get audited, a bank statement won’t suffice because it doesn’t show what you actually purchased. You can take a photo of paper receipts and scan them into an app that will store them for you, that way you don’t have thousands of paper receipts stored away. Just make sure you also have a backup somewhere in case something crashes or gets hacked. The IRS won’t care if you can’t provide documentation.
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