Death and taxes, these are two things you can’t avoid in life and with the end of the year coming it means Tax Day is not far behind. Can you believe it as those who filled extensions just turned in their returns and now we are roughly six-months from another tax deadline?
For those operating an online business paying taxes is especially worrisome as they don’t have access to some of the deductions which traditional businesses can take advantage of – mainly the depreciation of capital assets. Yet, small business tax preparation doesn’t need to be gut-wrenching and here are some tips on how to prepare your online business for tax season.
Home is Where the Office is
For many online entrepreneurs, their home is where the office is. The reason for this is simple as running an online business – especially a small business – doesn’t require the trappings of traditional businesses. In fact, all you need is a computer, an internet connection, and any number of Software-as-a-Service (SaaS) and Infrastructure-as-a-Service (IaaS) solutions available today.
But when it comes to taxes, an open question is how to properly take advantage of the home office deduction for business owners. For starters, the key requirement for a home office is that is used both “exclusively” and “regularly” for your business.
While this definition is in some ways contradictory as your home office could also double as a guest bedroom, most tax experts agree that the emphasis is more on regularly than exclusively. As such, you don’t need to fret if 10 percent of the time your home office is used for something other than business purposes.
Another thing which is critical for online businesses is that the IRS wants to know if your home office serves are your “principal place of business.” Between this requirement and the concept of your office being used regularly for business, you will be able to deduct a percent of your monthly housing expense based on the size of your office in relation to your home.
By the way, you can also apply this to your utility bills as you probably don’t have a second meter just for the electricity used by your business. That being said some experts do suggest that you get a second internet connection just for your business or even have your “home” phone and internet connected under the company’s name. This way these bills can be charged to your business. The same goes for your “personal” cell phone as the odds are that you are using it mostly for your business anyways.
Keeping Tabs of Contractors
This is extremely important for online businesses for two reasons. First, these are legitimate business expenses and second, you will need to issue 1099s for the contractors you employ as you are required to report these expenses.
Failure to properly report what you are paying your contractors could create issues as the IRS might determine that they are employees, and this would mean that you are liable to pay Social Security, Medicare, and other payroll taxes.
If you are not sure whether a contractor is defined as one by the IRS, then you want to look at a simple set of 20 questions. If most of your answers are “Yes” then the person is an employee. Conversely, if most of the answers are “No” then the person is a contractor.
For those just starting their online business, they will want to make sure their contracts promote a contractor relationship rather than an employee relationship. As mentioned, the reason for this is the liability to pay Social Security and other taxes.
However, if you haven’t done this and you find that you have a problem, then you will want to work with your accountant or tax preparer to figure out the best way to correct the issue. While the first step will be to update your contracts, you will need to figure out what to do about any unpaid taxes – as it is better to be proactive when it comes to uncovering past due taxes.
It bears repeating that you need to have your records to ensure you don’t run into any problems during tax season. As such, you want to get talk to your accountant or bookkeeper to determine what records you need to keep and then you want to follow this advice.
Doing so will ensure that you have the proper records and they have been properly entered into your accounting system. This will not only save you money when it comes to reconciling your books it will also make it quicker and easier to determine your tax bill (or refund).
There you have it; tax season is never fun but following these tips will help you to get your business prepared and maybe even help you save money in the long run.