The federal government collects taxes from various sources, including income, payroll, property, sales, capital gains, dividends, imports, etc.
Unfortunately, most small business owners and self-employed are unaware that the IRS will expect them to pay taxes on every income they receive, including money they earn teaching private lessons or babysitting children, because, in the IRS's eyes, they are considered gig workers or freelancers.
Unlike employed individuals whose employers remove taxes, small business owners are responsible for paying their taxes as they have no employers. After conducting a series of research and surveys, we have realized that paying taxes is trickier than it seems, especially for small business owners.
Below are a few things you should take note of when dealing with taxes in the USA that will be a guide to small business owners for a long time. Although importantly, small business owners should know that how they file their taxes depends on their entity's structure.
You must always be responsible for your actions as an individual, especially when it comes to money matters. Accountability on your part is crucial when it comes to taxes. Keep track of all business-related expenses so that when you file your annual tax return, you'll know exactly what to write off to reduce your taxable income.
If you have doubts or want to learn other useful things to document, visit the IRS Record keeping page for self-employed and small business owners.
If you are unsure what you should deduct, see part 2 of the Schedule C instructions, or you can consider getting help from a professional.
2. Business Structure
If you are a sole proprietor running a small business, your personal and business taxes would be combined. So, as a sole proprietor, your business revenue would be included in your tax when you file your yearly tax return using Schedule C, Form 1040. This also applies to individuals who run partnership organizations; the IRS does not recognize them as separate legal entities from their firm, so they must report business income in their tax returns.
The IRS can only recognize the business when it is a corporation, and the tax will be filed using Form 1120.
3. Knowing your taxable workers
Several small enterprises employ contract workers responsible for covering their taxes. Only the company's employees are subject to taxes.
Although these contract employees may violate tax payment withholding laws, the employer is not responsible for this.
Always monitor the deadline for filing your taxes. You'd be in charge of withholding if you failed to pay taxes.
As a single proprietor or self-employed person, you must pay your taxes quarterly rather than annually. Failure to do so could result in an underpayment penalty when tax season rolls around.
5. You will most likely be Audited
Most small business owners forget this while calculating their tax returns and subtracting expenditures.
The IRS will want proof that the amounts claimed are company expenses and not personal expenses.
6. He has a knowledge of deductibles
You should be aware that some expenses can be written off against taxable income.
To understand all the deductible expenses, check out the IRS Gig Economy Tax Center if you fall into the group of sole proprietors or new small business owners.