According to the IRS, all businesses except partnerships have to pay some kind of taxes. As a business owner, it’s important to understand the complexities of paying taxes. If you are unsure about your small business tax liability, it’s necessary to consult a tax advisor to ensure you don’t end up in the IRS bad books. Businesses with employees have more tax liability because they have to pay additional Federal and State taxes such as FICA, FIT, unemployment taxes among others. For business owners that generate an income of less than $400, not paying the unemployment taxes is a huge relief. But remember, you are still liable to pay some other forms of taxes. In most cases, the IRS may be reluctant to audit your business until you report a profit. Either way, try to file all your applicable taxes so that you can enjoy benefits such as deductions and also avoid legal issues in the future. For you to stay on top of your small business taxes, you have to anticipate your taxes and know how much you need to relegate towards paying them.
To be safe, set aside 35% to 40% of your income to cover your small business taxes. Remember, taxes are paid quarterly, so continuously set aside funds to avoid the last-minute hustle of finding funds. Depending on your business set up, the strategy to set aside funds for taxes may be different.
- If you are a new company, setting aside at least 30% of your earnings each time you are paid may be a good idea.
- If your business has started realizing profit recently, try to put aside 30% of your earnings aside every month.
- If your profit has stabilized year by year, take 30% out of a quarter of your annual gross income and set it aside for taxes. This can be done on a quarterly basis.
Depositing the funds set aside for taxes in a different bank account isn’t a bad idea because it separates these important funds from your regular spending account. When the time comes to file your taxes, these funds will be readily available to satisfy their purpose. Sometimes, you might underestimate the amount of taxes you owe and end up saving less than what is required. If you are faced with such a scenario, you don’t have to worry. According to the IRS, you will be protected under the safe harbor rule which allows you to pay up to 90% of the tax amount due. Filing your small business taxes can be a challenging task at times, but remember that you are not alone. For information and assistance with your tax filings, contact a Denver tax advisor today.