As a small business owner, you may feel overwhelmed by all the tax laws.
While there is a lot to know, we hope to break it down to lessen the overwhelm. Many business owners aren’t aware of the small business tax rate for 2019, estimated payments, or tax deductions they are eligible for. Learning these tax tips will help you possibly save money, be able to pay your future self, and help you avoid an uncomfortable situation come tax time. The most important factor when it come to taxes is to track everything from expenses to income.
Small Business Tax Rate 2019 Explained
There are many types of small business taxes. Let’s break down the most important ones.
Income taxes. Most small business owners will be an LLC or sole proprietor and will be considered a pass-through entity, which means the business itself doesn’t pay income tax. As an owner, you will pay taxes for the business on your individual taxes and report the business income on your personal tax return.
Employment/Payroll Tax. You only need to pay this if you have employees. Hiring a payroll company is highly recommended for these situations.
Self-Employment Tax. If your net earnings for the previous year were at least $400, and you are self-employed, you’re responsible for paying self-employment taxes. This includes Social Security and Medicare. Of course, there are some special rules that apply, so don’t forget to check those.
Depending on the type of business you own, there are different tax rates.
Most virtual assistant business owners will file as a pass-through entity, or sole proprietor, and will therefore pay based on their personal income tax rate. For 2019, these tax rates range from 10% to 37%.
There is an exciting new act, The Tax Cuts and Jobs Act (or TCJA) that just passed for 2019. It states pass-through entities and sole proprietorship’s can now deduct up to 20% of their business net income before their tax rate is calculated.
Of course, there are limits to this new law and we strongly recommend consulting a tax specialist to learn what these are.
State Small Business Tax Rates
Don’t forget about paying any state taxes that are required of you. All states levy a tax or some kind of charge on business income, with the exception of South Dakota and Wyoming.
The three main models of state small business tax rates are Corporate income tax, Gross Receipts tax, and Franchise Tax.
To help better explain tax laws, contact your state’s business tax agency.
Estimated Payments Explained
What are estimated taxes?
Estimated taxes are paid quarterly, or four times a year – April 15, June 17, September 16, and January 15 – to cover your anticipated tax bill. If you estimate too low or fail to pay quarterly, you will incur a fine, so it’s important to learn how to estimate and pay the taxes on time.
Do I have to pay my first year in business?
The good news here is that you are exempt to paying estimated taxes your first year in business. The rule of thumb is that once you owe money after filing taxes on your business, then you need to start paying quarterly.
What if I’m highly profitable in my first year?
The exception to not paying estimated taxes in your first year of business is if you expect to make more than $1000 that year. If you anticipate making more than $1000, consult an accountant and start making quarterly tax payments.
Don’t forget about small business tax deductions.
Why do small businesses get tax deductions?
Uncle Sam wants you to be successful, so the government gives you incentives to own your own business. These deductions are meant to help entrepreneurs with the costs of running a business.
What are some of the more well-known tax deductions?
Home Office. Unfortunately, the TCJA eliminated this deduction for anyone other than the people who use a Schedule C. So, if you deducted your home office in 2018, make sure you’re eligible in 2019.
Office Supplies. Make sure to save all your receipts for any office supplies such as pens, paper, ink, computer, software, etc..
Travel expenses and meals. There have been many changes to these deductions due to the TCJA, just as with the home office deductions. Any deductions related to “entertainment, amusement, or recreation” have been eliminated. Meals can still be deducted up to 50% as long as they aren’t considered “lavish or extravagant”.
Mileage. Don’t forget to document everything from the date, mileage, tolls, parking, and the purpose of your trip. There are many other deductions you can make including the interest on a loan for a new car, lease payments, gas, repairs, and insurance. Visit Bankrate for more info.
Don’t forget about these often-forgotten deductions.
Insurance Premiums. These are generally able to be deducted, but it’s important to consult the IRS to see if you’re eligible.
Social Security. Did you know if you’re self-employed, you have to pay DOUBLE the social security contributions? This is because normally an employer would pay half and the employee is responsible for the other half. But if you’re self-employed, you have to pay both, which means you own 15.3% of your net profits. In order to soften this blow, the government will allow you to deduct half of the contribution on your 1040.
Retirement Contributions. There are 3 unique IRA’s you can get if you’re self-employed – solo 401(k), SEP IRA, or Simple IRA. Contributing to these allows you to deduct your contributions while paying your future self.
Child Labor. If you operate as a sole proprietor, you may be able to hire your children and deduct their pay from your business income. If the child is 17 or younger, there is also no Social Security or Medicare tax.
Advertising. Ordinary advertising is fully deductible.
As you can see, there are many tax laws, with qualifications within those laws, that requires someone knowledgeable to help you along the way. It’s very important to start tracking everything from the very beginning. Being organized this way will help you during tax season. Some great resources we found were at Dave Ramsey, Quickbooks, and Small Biz Trends.
We at Valley Virtual Assistance want you to be informed to make the best decisions for your business. We know tax time can be stressful and we want to help alleviate some of that stress. We hope we’ve helped you to begin to understand the many laws out there and to help you start a conversation with your tax specialist.