Filing your tax return is tough, but as a business owner, it’s even harder. In fact, more than 40 percent of business owners spend at least 80 hours on taxes each year!
It’s hard enough when you have a dedicated bookkeeping department. But when you’re operating a home-based business and are the only employee, you have no one to turn to but yourself.
Luckily, there are things you can do to help you save money on your home business taxes and streamline the filing process at the same time.
Here are a few simple tips to try this year.
1. Write Off Your Home Office
When you run a business, you’re permitted to use your commercial rent or mortgage payments to reduce your tax liability. But that’s not an option for home-based business owners.
Your office is at your house and it’s intrinsically tied up in your mortgage or rent payments.
Luckily, the IRS allows you to treat a portion of your rent or mortgage payments as a business expense, just like you could if you had a separate office away from home. And it’s always a percentage of the total square feet of your home.
For example, if your office is about 15 percent of the overall square footage of your house, you’re allowed to deduct 15 percent of your rent, mortgage, and utility costs from your taxes.
What Qualifies as a Home Office
Not all home workspaces qualify for the deduction. The space has to serve as a primary workspace and can’t get used for anything other than work.
If you use the office for your business, but also use it to play video games in the evening, you can’t take the deduction. And if the workspace is in a shared area of the house, it has to be separate from regular daily activities.
This means you can’t take the deduction if you work at the dining table or in the living room. And if you try, the IRS can penalize you. But you can deduct the cost of furnishing your home-based office, even if it’s a separated nook in your small apartment.
2. Pay Quarterly Taxes on Time, Every Time
When you work for a business, they withhold taxes from each paycheck. But when you own your own business, you’re responsible for paying taxes throughout the year.
And those payments get paid every quarter like clockwork. If you miss a payment, the IRS will fine you.
So, how do you know how much to pay? Well, you do a bit of guesswork and math.
Look at the total tax you paid the previous year. Then, divide this number by four and, voila! You have your estimated tax payments.
Worried about possible penalties? Don’t be. The IRS only fines you for underpaying taxes if the amount you send comes to less than 90 percent of your taxes owed or the full amount you paid in taxes the previous year.
This simple calculation lets you avoid those underpayment penalties. If your income grows over the year, you’ll need to pay the remaining amount to the IRS.
Setting money aside each month will make those quarterly payments a bit easier. But hardships can happen at any time and you might not be able to pay your tax bill on time or at all. Check out this post to find out what you can do.
3. Make Recordkeeping a Priority
As a business owner, you’re responsible for the entire operation. This includes recordkeeping. And great records make filing your taxes far easier.
Make recordkeeping a priority throughout the year. Keep track of invoices and income earned. Monitor your expenses and save your receipts for any purchases you make for your company.
This will help you track and qualify for deductions when you’re filing your return. And the more information you have, the easier it is to track down missing statements should the IRS audit your company or reject your return.
4. Separate Business and Personal Expenses
When you work from home and run your own business, it’s tempting to pay for everything out of the same checking account. After all, you’re the only employee and your office is literally in your house.
But it’s one of the worst mistakes you can make. When you make purchases for your business out of your personal account or on your personal credit card, it’s hard to track them.
Transactions get mixed up, receipts get misplaced, and you might not remember which trip to the store was for school supplies instead of new pens for your work desk.
This makes it incredibly difficult to accurately take deductions when you file your taxes.
Instead, open up a separate business account and use it for business only. This way, you’ll have an accurate log of your business’s expense and purchases throughout the year.
5. Get Help from an Accountant
The easiest way to simplify your taxes is to work with an experienced accountant. They know the ins and outs of the tax code and can find you deductions you might not know you qualify for. Even better, they’ll make sure your taxes get filled out correctly so you don’t have to worry about errors delaying your return.
What to Look for In an Accountant
Ideally, choose an accountant that’s familiar with your industry. There are some deductions that are more common for certain types of businesses.
And when you choose an accountant that’s familiar with your type of business, they’ll be better equipped to maximize deductions and lower your tax liability.
Schedule consultations with multiple professionals and pick the one you feel most comfortable with. The best accountant will listen to your concerns and be able to give you answers you can understand.
Simplify Your Home Business Taxes
Taxes are a fact of life, but filing your home business taxes doesn’t have to be stressful. Take the time to maintain records, keep track of your expenses, and always treat your business like a true business. You’ll be well-equipped to take care of your tax liability each year.
Looking for tips to help you stay productive at home and avoid all those annoying distractions? Check out this helpful post.