Undeniably, the taxation world is pretty intricate. From complex terminologies to filing technicalities – business owners have to keep up with sophisticated taxation processes. Similarly, they have to calculate taxes every quarter while ensuring compliance with the internal revenue system (IRS). Whether it is a business-related deduction or tax advantage by the government, you have to account for every tax obligation in the filing procedure.
Additionally, the governments have developed sophisticated processes for defining the potential taxpayers. Thus, you have to determine your income brackets to calculate the overall tax liability. In case you are unable to keep up with taxes, let us help you out. Here is everything you need to understand the everyday taxation laws for your business.
1. Tax Obligations & Calculations
It doesn’t matter if you are a self-employed individual or a corporate business account; you should have a keen understanding of your tax obligations. Firstly, you have to consider the tax burden in your annual financial planning. Secondly, share the tax burden with your customers by including the tax component in your pricing strategy.
Once you have defined taxation strategies, determine your tax obligations. As a self-employed individual doing trade, you are only liable to pay income tax. It has seven income brackets ranging from 10%-37% which means, you have to determine where your income falls. Otherwise, if you are a corporate owner, you have to pay corporate and income tax. The corporate tax is currently 21%, and owners have to deduct this from business profits.
Does this sound overwhelming? If so, consider learning the ropes. You can familiarize yourself with the taxation world by taking up short courses or pursuing higher education. If you don’t have a master’s degree yet, consider completing LLM in tax to manage business taxes adequately.
2. Filing Procedures
For filing your taxes, you must understand your tax rate with the local and state taxes that might apply to your business. After this, you have to decide on your tax payments. Do you plan to pay taxes quarterly, or will annual returns be more convenient? After all, there is a different procedure and protocol for every filing date. Have a look below.
- Quarterly Payments: If you want to file tax every quarter, use Form 1040-ES. You have to use the blank vouchers in the form to mail your estimated tax payments. Otherwise, you can also pay using the electronic deferral tax payment system (EFTS).
- Annual Return: For the annual taxations, you have to report your profits and losses. You can use a Schedule-C form to report the income and a Schedule-EZ form to determine the social security and Medicare taxes. Also, provide all the evidence to avoid any external audits because any mistake from your end can become a compliance issue.
3. Tips for Reducing Taxable Income
Undoubtedly, no business owner likes giving a small chunk of their profits in taxes. Still, they can’t escape since it is an obligation. However, one thing you can do is to find ways to reduce the overall taxable income. It doesn’t mean you have to indulge in shady practices; instead, some smart deduction techniques can help you write off taxes. Here are five tips for reducing taxable income.
- Vehicle Expenses: Does your business have any vehicles? Business owners can deduct up to $25000 in vehicle expenses, including the mileage deduction for all the travel charges.
- Supplies & Equipment: All the office supplies necessary for the business’s functioning are tax-deductible.
- Depreciation Charge: Indeed, owners pay for the fixed assets straightway, but according to accounting principles, they have to spread the cost over its useful life. Thus, you can include depreciation expenses in your financial statements to reduce taxable income.
- Health Insurance Premiums: All business owners can deduct healthcare costs for themselves and their families from the taxes.
- Claim Indexation: You can revalue your property and treat them as an expense in case of losses.
Understanding the everyday business taxation laws can be pretty challenging. You have to keep up with changing tax rates, income brackets, and state regulations. Likewise, you ensure tax calculations are precise and accurate to avoid any IRS audits. Above all, you have to track your expenses all year round to identify potential deductions. It might sound overwhelming, but with sufficient knowledge and expertise, anyone can manage taxes.
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