Tax Fact #1: The IRS is very strict about comingling funds. Keep your personal and business funds separate.
When you first start your business, it’s a whirlwind of activity and financial worries that will leave you blinking in confusion and exhaustion. I think this is one of the most common reasons that people don’t think about setting up business versus personal bank accounts. It’s so easy to just deposit money into one account and use it for all of your expenses, right? Especially when your business expenses are essentially coming out of your own pocket anyway, and you need anything the business earns to help pay your bills. I get it.
I get it, but I don’t agree with it. I’m not gonna mix words here: comingling your personal and business finances is a stupid idea. The IRS is crazy strict about this, and dumping all of your funds into a single account is a great way to make yourself an attractive audit possibility. If you DO get audited, not keeping track of your income and any investments and expenses you’ve had is going to be a nightmare. After spending dozens of hours staring about bank records and trying to figure out where the heck you spent your excess funds, you’ll definitely never comingle again… but it’s a better idea to just never start doing so in the first place.
Set up a business account and deposit funds from your business into it. Transfer funds to your personal account as needed, and do this for any personal purchases you’re making (don’t use a business debit for groceries). Keep track of your personal and business expenses using software like QuickBooks, and you won’t have a problem when it comes time to file taxes.
Tax Fact #2: As an entrepreneur, you may be required to file quarterly tax returns.
Filing taxes is a must, but understanding exactly when to do so can be hard when you’re just starting out (or even if you’ve been at it for awhile). Which forms should you use, how much should you pay, and when should you be paying them?
Some entrepreneurs will be required to make quarterly tax returns. You need to estimate the amount that you expect to claim on your tax return for the year, and make a total of four quarterly payments. You don’t have to pay the same amount in each quarter as long as you eventually meet the estimated tax numbers you calculated. Don’t forget to keep state taxes in mind when figuring this all out!
Tax Fact #3: W2 employees file tax returns once a year. Entrepreneurs and 1099s may be required to file more often.
When you work for someone else as an employee, your employer is responsible for withholding the correct amount of taxes from your paycheck. This means that you file taxes once a year and might expect a tax return about as often.
If you’re running your own business or working as a self-employed individual or independent contractor, however, then you’re responsible for your own taxes. You have to withhold money and make payments to the IRS – and if there’s a mistake, you’ll be the one paying for it.
Some entrepreneurs might have to pay taxes quarterly instead of once a year. If this is the case, you’ll need to estimate your annual income and start paying as quickly as possible to help avoid fines.
Tax Fact #4: Claiming the home office deduction DOES NOT automatically trigger an audit.
More and more people are working from home these days, and that includes entrepreneurs. Working from isn’t just comfortable – it’s often more economically efficient than renting an office space.
If you work from home, you might be eligible to claim a home office deduction on your taxes. This would enable you to claim your home office as your principal place of business, and means that you might be able to deduct things like office repair and even parts of your utilities bill.
While a lot of people might qualify for the tax break, few are willing to actually claim the office on their taxes. There’s a misconception that filing for the home office deduction will automatically trigger an audit. This is not the case, and if you qualify for the deduction then you should definitely consider taking advantage of it.
Tax Fact #5: Filing an extension does not mean you get an extension to pay the the monies due (if any).
So you hear the phrase “tax extension” and breathe a sigh of relief knowing that you’ve got more time to pay, right? Wrong.
While filing a tax extension will get you some more time to file, it does NOT get you more time to pay. Your payment is due on the original due date of the return. If you do not submit your payment by that date (usually April 15th), you will have to pay interest on the money yet to be paid.
To avoid paying extra money, pay as much as you possibly can by the original tax return due date.
Tax Fact #6: There is no such thing as the “student exemption” to paying taxes.
I know a lot of college students who think they’re blessedly exempt from filing taxes simply because they’re in school full time. Listen, the IRS doesn’t care what you’re doing with your time if you owe money. Student or full-time employee, you’ve got to pay your taxes.
If you’re still not sure if you need to pay or not, take your current status and simply remove “student” from the equation. If you’re under 65, single (as in not married), and earned income, then you need to file your taxes. Attending classes doesn’t excuse you from that.
photo credit: taxreceipts.com