If you’re a small business getting ready to file business taxes for the first time, it’s a daunting process. But it doesn’t have to be — as long as you understand some of the subtle nuances. Here are some quick tips for novice taxpayers, brought to you by Chandler & Knowles CPAs.
As a business owner, it pays to be prepared come tax time. This means having your income and expense records together and also knowing things like the standard business mileage rate you can deduct. You also need to know which forms to file — something that your accounting software and/or accountant can help you determine. Next, know your deadlines. Finally, double-check your information before you file.
Understand reasonable compensation
If you are an S corporation, keep in mind that you must pay yourself and any shareholders reasonable compensation. Reasonable compensation takes into account things like training, responsibilities, and comparable salaries. If you are unsure of what would be considered reasonable for your or your partners’ salaries, you can look up similar jobs online and compare these to what the same position offers at your company. While you can pay more than the average, you must at least meet the minimum standard in your industry.
Classify your contractors and file taxes
If you have anyone working for you, they are likely an employee or an independent contractor. In the case of the latter, you must not forget to report their compensation on your business tax return. For 2020, there is a new form — the 1099-NEC. This is actually a reinstatement of a form that has not been used in nearly 40 years. The 1099-NEC does not replace the 1099-MISC. Instead, the 1099-NEC is used exclusively for non-employee compensation, while the 1099-MISC is used to report medical and healthcare payments; rent; prizes, giveaways, and awards; and other types of payments.
Non-employee compensation is any money paid to an individual for services — for example, a contract with a web developer to design a site for a set fee. You will likely give them a check for that amount without deducting taxes. Moreover, you write the check directly to the developer, not a company. This is your contractor, and if the total amount of the project costs you more than $600, you must submit a 1099-NEC.
Navigating tax paperwork for independent contractors can be complex. Fortunately, you can file a 1099 online to streamline the process and do away with the guesswork. A solid platform like QuickBooks can do exactly that in just three steps, and you won’t even have to worry about costly mistakes.
Be ready for an audit
Speaking of mistakes, there are few things more alarming to a business owner than receiving an audit notification from the IRS. But as stressful as this may be, it is not the end of the world. If you have your accounting paperwork organized, it should be a fairly seamless process. An audit can take weeks to years to complete, but the more information you have at the beginning of the audit, the quicker it will wrap up.
If you’ve already been audited, there are a few ways to reduce the probability of it happening again. These include double-checking your calculations, reporting all of your income, and only using deductions that make sense for your industry and your income level.
Filing taxes doesn’t have to be complicated. If you are using tax software and have an accountant, you are already on track to filing accurately and efficiently. But this does not mean you should not arm yourself with information. The more you know, the better prepared you can be when the deadline comes around.
Reach out to our team
Whether you’re just starting out in business or looking to expand an existing one, Chandler & Knowles CPAs can help you with your goals. Contact us today to get the help you need to make sense out of your tax situation. Call 817-430-3000 or click the button below.