Many of the country's 28 million small business owners begin to panic when April approaches. While the exact due date varies, citizens and business owners alike are required to file their taxes around this time of year, and failure to file could result in stiff penalties. Rather than turning a blind eye to your small business's taxes, you should consider ways to lower them. There are several steps you can take to reduce the amount of taxes your business is required to pay.
#1) Hire Independent Contractors
When possible, hire independent contractors instead of employees. As explained by the U.S. Small Business Administration (SBA), employers must pay additional taxes for employees. Independent contractors, on the other hand, are responsible for paying all their taxes. Furthermore, you aren't required to provide independent contractors with the same benefits as employees, including minimum wage, overtime pay, vacation time and more.
#2) File Taxes Online
This isn't going to necessarily reduce the amount of taxes you are required to pay, but filing taxes online can still prevent accounting errors that could otherwise cost your business money. According to the Internal Revenue Service (IRS), roughly one in five paper tax returns contain errors whereas only one in 100 electronic paper returns contain errors. Using tax software, you can quickly prepare and file your business's taxes. Tax software usually features predefined fields that reduce the risk of error, making it a smart way to file your taxes.
#3) Separate Business and Personal Funds
Mixing your business and personal funds is a serious mistake that could leave you in hot water with the IRS. Known as commingling your books, it's one of the leading triggers of an IRS audit. And if your business is audited, the IRS may find other costly mistakes that you've made in the past. To reduce the risk of an audit, keep your business and personal funds separate. If your business supports mobile commerce, for instance, make sure that all customer payments go into your business's bank account and not your personal bank account. As long as you have a dedicated bank account for your business's transactions, this shouldn't be a problem.
#4) Make Donations
A simple way to offset your business's taxes is to make donations. According to the SBA, up to 75 percent of the country's small businesses donate to nonprofit organizations each year. The IRS currently allows businesses to deduct monetary donations and property donations of up to 50 percent of the business's adjusted gross income. Granted, your business will earn less money, at least on paper, if you donate. The good news, though, is that you can deduct these donations from your taxes. So, if your business had a strong year and you want to lower the amount of taxes you are required to pay, consider donating to some of your favorite nonprofit organizations. Just remember to keep the receipt in case you are audited or otherwise need to show proof.
#5) Write Off Your Home Office
If you work from home, don't forget to write off your home office as a tax deduction. According to NerdWallet, the IRS allows business owners and independent contractors who work from home to write off their home office on their taxes. As long as your home office is smaller than 300 square feet, you'll receive a deduction of $5 per square foot with a maximum deduction of $1,500. A 200-square-foot office, for example, would yield a deduction of $1,000.
Tax time shouldn't cause headaches for your small business. By following these tips, you can save money on your taxes and focus that energy elsewhere, such as expanding your business into new markets.