Tip! These helpful tax tips are just a few of the many tax tips that can help tax preparation flow more smoothly. The above mentioned tax tips will also help to reduce the amount of money that an individual owes on federal or state taxes or even potentially increase the amount of their refund.
Running a one-person business? Tired of the huge hit you take at tax time? Want to save money on your accounting and taxes? Consider these simple tips and tricks…
Tip 1: Use an accounting system
Oh sure. This sounds obvious. But unless you have a decent way to track both your income and your deductions, you not only won’t know how much money you’re making until tax time, you’ll also miss or forget about tax deductions.
Something like Quicken or Microsoft Money will work just fine. If you need more bookkeeping horsepower than these checkbook programs provide, look at stepping up to QuickBooks or Microsoft Small Business Accounting.
Tip 2: Don’t Incorporate
New business owners often rush to incorporate. But incorporation rarely makes sense for small businesses. And incorporation totally complicates your taxes and accounting.
What’s a new business owner to do? Form a limited liability company instead. A limited liability company, or LLC, gives you all the same liability protection. But without the tax complexity of a corporation.
An LLC with just one owner, for example, gets treated for income tax purposes as a sole proprietorship. Which means to report your business activity to the IRS or state revenue folks, all you do is file a simple, one- or two-page schedule with your regular individual tax return.
Tip: Consider hiring your kids
If you have minor children and they help you out in your business—doing real work—consider hiring them. As long as they earn less than $5,000, they won’t pay any income taxes on their wages nor any payroll taxes. Yet, you’ll still get to write-off the amounts you pay them as business expenses. (This might be a neat way to save for a kid’s college expenses.)
Tip! Another one of the most common tax tips that taxpayers need to be aware of is what to do if they can’t pay the amount of taxes owed on federal or state tax returns. The biggest mistake that taxpayers make when realizing that they cannot pay the amount due on their taxes is to not file a tax return.
Tip 4: Consider hiring your spouse
While medical insurance is a deduction for income-tax purposes for sole proprietors, you can save far more in taxes by hiring your spouse and then setting up what’s called a Section 105(b) plan. Such a plan lets you treat all of your family’s medical expenses (insurance, out of pocket, deductibles and so on) deductions for both income tax purposes and self-employment tax purposes.
If you are interested in this, confer with a local tax practitioner. Section 105(b) plans can be a little tricky to understand if you haven’t used them before.
Tip 5: Take the home office deduction
Hey, if you regularly and exclusively use some portion of your home for your business, go ahead and take the home office deduction.
Don’t worry about this deduction being an audit flag. Or a hassle. The deduction is meant for people like you.
Tip 6: Set up a pension plan
If you want to save more than a regular IRA allows, set up a pension plan for your business. You can easily set up something like a SEP-IRA which will allow you to contribute up to twenty of your profit to a tax deferred account.
Example: If you make $50,000, you could use a SEP-IRA to contribute $10,000 to your pension account. And there are other good low-cost options available, too, such as SIMPLE-IRAs and one-person 401(k) plans.
Tip! Other than following the above mentioned tax tips for small businesses; you also need to maintain an order in your business. Maintaining your accounts and other documentation, keeping a track of the filings by your employees, and accessing your tax beforehand with the help of your accountant, will save time and money.
To get more information on small business pension plans, contact the Vanguard Group at www.vanguard.com or Charles Schwab at www.schwab.com.
Tip 7: Learn and then use TurboTax or TaxCut
A final tip: In most cases, the taxes of sole proprietorship are pretty simple. So, rather than come to someone like me (a CPA) or an enrolled agent or one of those nationwide tax preparation firms, try doing your return yourself using tax software.
Programs like TurboTax and TaxCut work great for simple-situation sole proprietors.
href="http://www.stephenlnelson.com"> Seattle CPA and financial planner Stephen L. Nelson CPA is the author of Quicken for Dummies and QuickBooks for Dummies. Contact him at http://www.stephenlnelson.com
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Tags: income tax, tax preparation, tax attorney, tax reduction, paying tax
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