Answering tax-related questions are one of the many important things you need to do when starting a new business. Once you become your own boss, you need to review the following big changes to become effective and successful at your chosen venture.
1. Your Income Is Always Taxable
Even if you reinvest your income into your business, it will still be taxable. The profit your business make annually will be taxable whether you decide to withdraw it or reinvest it to develop your business more. The good news is, any deductible business expenses are useful when directly offsetting that income.
It’s actually different from employees whose non-reimburses expenses are subject to a threshold based on 2% of their adjusted gross income and are only deductible if their deductions are itemized.
2. Learn About Self-Employment Tax
Self-employment tax pays for contributions to both social security and Medicare. It will be charged to the net profit of your business. A 15.3% rate of self-employment tax is currently being paid by you on your net earnings from self-employment of to $127,200, and Medicare tax only at a 2.9% rate on the excess.
A Medicare tax of 0.9% will be added and imposed on self-employment income in excess of $250,000 for joint returns; $125,000 for married taxpayers filing separate returns; and $200,000 in all other cases. Self-employment tax is imposed in addition to income tax but half of your self-employment tax can be deducted as an adjustment to income.
The additional tax is created with the same purpose as the social security and Medicare taxes that would usually be withheld from the wages of an employed taxpayer. It may look burdensome but it does have a purpose. Not only that, your chance to receive higher social security benefits at retirement increases because of the social security portion of the tax.
A small business with the status of a corporation will not be subject to self-employment tax on the earnings but you will be subject to payroll taxes since shareholders performing services for their corporations are mandated to be paid Form W-2 wages subject to social security and Medicare withholding.
3. Expect New Filing Requirements
It’s pretty common for individuals with taxable income within specific threshold amounts to not be required to file a tax return for the year. A single individual below the age 65 generally has to file only if their adjusted gross income exceeds $10,400, in 2017.
Self-employed individuals, on the other hand, earning a $400 or more net income from their business will be required to file a tax return. The same thing happens even if 400 is your only income and you are thus far under the usual filing threshold.
4. Make Quarterly Estimated Payments
If you’re a self-employed individual, you're 100% on your own which is different from employed individuals who meet their tax payment requirements once their employer withholds state and federal taxes from each paycheck. A self-employed individual meets their tax payment retirements by making estimated tax payments quarterly online or via the mail.
If you’re self-employed as well as an employee for another business, satisfying your required tax payments can be done by increasing the amount of withholding from your wages.
Make sure you do not fail to make your required payments or else you’ll have to pay an underpayment penalty. You can meet certain specified exceptions or waivers to be able to avoid penalties. A penalty is an interest rate charged by the IRS on deficiencies such as the amount of underpayment for the period of the underpayment.
5. Prepare For The New Business Tax Scrutiny
It’s noticeable how the IRS would audit self-employed individuals more often among many other groups. It is, therefore, best for you to always be prepared for the possibility of being audited although it doesn’t always mean you’re in trouble unless you’ve actually made a mistake. One of the most important habits you can follow is to carefully record your income and expenses in correct order to be able to fully claim the amount of the deductions to which you are entitled.
The IRS looks closely on certain types of expenses such as automobile, travel, entertainment, meals, and office-at-home expenses because they fall under special record keeping requirements and/or limitations on deduct-ability.
