How to Estimate Taxes for My Small Business
Getting help estimating your small business taxes can be as frustrating as going camping for the first time. Everyone loves to give advice on what to bring on a camping trip. From friends to family, everyone has their favorite foods, blankets, and gadgets that take up way too much space in the backpacks. At the end of the day, though, you’re the only one who knows how long your trip is and who you’re taking with you.
Estimating your taxes is no different. You know the details of your itinerary and crew, and with a few simple staples, you’ll be set. Let’s go over the basics of what you’ll actually need to make your first tax estimation trip a success.
Who are you and where do you stand?
Before you start your tax journey, you need to know who you are and what resources you bring to the table. You wouldn’t go out and spend money on a giant beach ball if you’re going on a camping trip in the woods, so why would you pay S-Corp taxes when you’re an LLC?
There are five small business types you can identify as: sole proprietor, partnership, C-Corporation, S-Corporation, and LLC. All of these types are going to have similar taxes with the exception of the stable C-Corps, which have a flat taxation rate (chances are, if you’re a small business, you’re not a C-Corp, so we won’t go too deeply into that).
If you’re having a bit of a business identity crisis, the IRS can help you find your footing before starting your journey.
Income taxes, employment taxes, and deductions, oh my!
Once you know who you are, you need to know what supplies to bring on your trip. No matter the destination, your business will likely deal in three supply categories: income tax, employment tax, and deductions and credits. That’s it! With only three supply categories to account for, there’s nothing holding you back from the great outdoors.
Let’s start with the big one; your shelter, your tent. The good news is, your income tax rate is easily determined by your bracket, which makes sense — the more taxable income (total profits minus deductibles/expenses/employment tax) you earn, the higher your tax rate will be. Your bracket is also easy to find on the Form 1040-ES, so picking the right tent won’t be a hassle.
The bad news is that depending on the size and structure of your business and how often you pay estimated taxes, the type of tent you need might change. It’s not too complicated, but it does mean you’ll need to keep an eye out on the weather to make sure you’re using the right brand for the right trip. If you’re paying estimates after each quarter and those amounts fluctuate, so will your taxation rate.
Alright, we know who we are, where we’re headed, what tent we’re using, and now it’s time for food and drink. The employment tax menu is made up of two categories: social security taxes and Medicare taxes. Again, for a small business, this can be a simple menu! No need for gourmet meals on a weekend trip. The most important thing to remember about employment taxes is that your employees are also contributing.
Both social security taxes and Medicare taxes will be supplied half by you and half by your employees. Fair is fair when everyone is eating the baked beans. For social security, you’ll be paying half of 12.4% of your employee’s income and for Medicare, half of 2.9%.
The complexity here comes in depending on how many travelers are joining you on your journey and how long they’re journeying for. A small amount of employees on the same salary is straightforward. A large amount of employees on hourly wages with different work hours gets far more intricate and can become a nightmare!
Deductions and credits
Ah, the favorite category. Deductions and credits are ways to lower your total taxable income so that you pay less in taxes.
If you’re a small business (not a C-Corp), you automatically get a 20% deduction. That’s a huge gift. That means without adding any expenses or additional deductions, if you made $75,000 in income, you automatically get a $15,000 deduction. That can drop you multiple brackets and lower your taxation rate.
Other common deductions, credits, and expenses include rent, advertising, office supplies, utilities, repairs, and transportation. By the time you’re done adding up all your deduction supplies, your trip might just end up paying for itself.
Time to estimate
Once you have all your supplies in order, you’re ready to head out on your trip. Add up your employment tax and your deductibles and subtract that number from your total profits.
When you have that number (aka your taxable income), simply take the appropriate bracket percentage from it to find your taxes. For example, let’s say your taxable income was $50,000 and your tax rate for the $50,000 bracket is 8%. Your taxes owed would be approximately $4,000.
Now, it’s just a matter of how often you’re going camping. Some small businesses pay that $4,000 once, some divide it and pay quarterly, and some wait until the IRS tells them exactly how much they owe. It all depends on the size and structure of your business.
Never do taxes again when you work with an accountant!
Of course, the best way to do your small business taxes is to not do them at all! You could take the time away from your creative endeavors to plug in the numbers, but why do that when you can easily partner with an accountant and never have to answer these questions again?
Estimating taxes sounds like the perfect camping trip to us, but we know it’s not everyone’s cup of tea. That’s why Know Your Numbers Accounting works with small businesses to get their taxes in order and their books back on track.
Whether you need tax and audit support, financial guidance, or clearer sales records, we’re here to handle whatever you throw our way. Schedule a call today and say goodbye to tax season stress.
What’s your biggest frustration about small business taxes? Let us know in the comments below!
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