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I pay Taxes on my Business?
by Kay Green,
You now are the owner of your own business. You have a business name, a
tax ID number for the state and an EIN number for the IRS. Now how do
you figure out how to pay my taxes?
Uncle Sam always wants his fair share so the plan is not too hard. First
you need to keep good records of every dollar you make in your business
and every dollar you spend in your business. I HIGHLY recommend a
separate checking account, debit card and credit card that is only used
for your business. In your checking account you want to deposit every
sale, whether cash or credit card or paypal. Be sure to label in your
checkbook register what the customers name was for that deposit. Keep a
written receipt of that sale as well. For every expense for your
business, use only your business checking account or debit card or
credit card. Keep receipts for all expenses.
At the end of each month after you have paid all your bills for the
business you can take out a personal draw and pay yourself. You do not
take taxes from this. Simply write yourself a check and enter it in your
checkbook as owners draw. That is the profit on your business. In the
beginning of your business you may not have any profit or you may choose
to keep it in the business to buy more products or use for advertising
or other business expenses. The owner’s draw is not an expense but
rather just a way to take out your owner’s equity of the business.
A good soft ware program will help you track all of your finances. You
can use Microsoft Money, Quicken or QuickBooks. There are also other
good ones out there. The main thing is to enter in your income and
expenses and print a monthly report. At the end of the year print a
yearly report too. This program will give you most of the numbers you
need for taxes.
You may have other expenses for your business that were either paid out
of your home account (not a good idea) or on a credit card or that you
paid cash for. (PLEASE DO NOT PAY CASH for business expenses. IRS wants
a paper trail.) Enter those in your software program too. IRS prefers to
see a clear separation of business money and home money.
Remember things like travel expenses, your Internet Service Provider if
you have an online business, long distance, ink for your printer, a
second phone line to run your online business, postage, printing, etc.
Another big deduction is the miles you travel in your car for your
business. Keep a log in your car listing the miles on your car on
January 1 and on December 31 of each year. List each day you drive where
you went for business and how many miles it was. The yearly deduction
for miles varies from 32-37 cents a mile so this deduction adds up. I
learn to plan some business activities, purchases or contacts whenever I
am out driving. (you can also deduct volunteer miles (church, scouts,
PTA, etc at 15 cents a mile on your personal taxes - not business).
Remember to keep track of all the products you donate for advertising,
prizes for contests, samples, etc. You want to deduct those items at
your cost. Also deduct any bad debt, bounced checks, returns and bank
fees. And printing, postage, advertising, internet connection, web page
hosting, office supplies, etc.
If you carry inventory of products then at the end of the year you need
to take an inventory count of what you have on hand. If this is your
first year in business then your opening inventory would be 0. If you
had inventory at the end of last year, then that becomes your beginning
inventory this year. You count inventory by your COST. If you carry
inventory you can deduct the space of the room where you keep them (as a
home office deduction-even if the room is used for other things).
For your business you will fill out a Schedule C on your federal taxes.
On that form you will enter
Your gross sales (income) for the whole year minus
Your cost of good sold (inventory bought) PLUS
Your inventory at year end minus
All your expenses
Your mileage expenses will be figured on another form and then entered
on your schedule C as a dollar amount.
If you have profit at the end of this form you will enter that number on
the front of your 1040 Tax form (which will increase your family
income). You will also have to figure the self-employment tax on that
profit. If you have a loss on the Schedule C then that negative number
is entered on your 1040 Federal form (which reduces your family income).
Then as you complete your 1040 Tax form you figure your taxes due for
all your family income. This way Uncle Sam gets taxes on your business
I personally like to use software like Tax-Cut or Turbo Tax Home
Business to figure all this out. It makes it easy and asks you all the
right questions for your tax forms. You do still have to have the income
and expenses numbers for your business and the mileage numbers.
If you owe more than $500 in taxes after all this, you may be required
to do quarterly tax payments the following year for your business. Be
aware to watch for that. You can do voluntary quarterly payments if you
are making profit too. Figure 15-28% on federal depending on your tax
If you live in a state with a sales tax (I do not) then you will
probably have another form to complete yearly or quarterly for all the
sales you make and sales tax your collect to your customers in your home
Remember IRS wants you to make a profit in 3 out of 5 years. If you do
not make a profit this often then they may not let you take the business
deductions - counting your business as a hobby instead of a business.
Make sure you make your business look like a business. Get business
cards, business license, advertising materials, EIN etc.
PS. I am not a tax account or CPA. I am simply a business owner. So
please make all tax and legal decisions with the help of a professional.
You may want to hire a bookkeeper or accountant to check things over
when you are done. And that would be a write-off too.