If you are self-employed or a contract worker and you are generating a profit, you may need to pay estimated quarterly taxes. This is the Internal Revenue Service’s (IRS) way of collecting taxes from people who don’t have them withheld from their paychecks through payroll.
Our guide on estimated quarterly taxes will help you understand who needs to pay them, how to calculate them, and how to pay your quarterly taxes.
If you have questions about estimated quarterly taxes or need help calculating how much you should pay, our team would love to help! Our clients can easily schedule a time to meet with us to discuss your unique situation.
Who Needs to Pay Estimated Quarterly Taxes
Most people pay their taxes throughout the year by having them withheld from their paychecks. When you are self-employed, however, you pay estimated quarterly taxes to cover those taxes.
Self-employed individuals, including contract workers, sole proprietors, LLC owners, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe $1,000 or more in taxes when their return is filed.
This means if your new business is not yet making a profit, you do not need to make estimated quarterly tax payments.
There are cases when you may have to pay estimated quarterly taxes even if you are employed and your employer is taking your taxes out for you. If you receive income from the following categories you may have to pay estimated quarterly taxes.
Interest
Dividends
Alimony
Capital Gains
Prizes or awards
Calculating Estimated Taxes
Quarterly estimated tax payments are based on estimations of what a business owner believes they will make in a quarter. Taxpayers estimate their income and their deductions in order to calculate the estimated quarterly taxes.
The IRS suggests using your previous year’s income and deductions to help calculate this year’s estimated taxes. They also provide an IRS’ Estimated Tax Worksheet on form 1040-ES to help you calculate your taxes.
The important thing to remember with quarterly estimated taxes is that they are estimates. If you over or under-estimate your taxes, you can file another form with the IRS to fix those taxes. If you make more or less income than you anticipated, you can also refigure your estimates for the next quarter so that you aren’t always over or under-estimating your taxes. Make sure you’re doing your best to make accurate estimates so you can avoid potential penalties.
Estimated Quarterly Tax Deadlines
For 2023, the Estimated Quarterly Tax due dates are:
1st Quarter – April 18, 2023
2nd Quarter – June 15, 2023
3rd quarter – September 15, 2023
4th Quarter – January 16, 2024
Be sure to save these dates in your calendar and set reminders so you don’t miss the deadlines.
How to Submit Your Taxes
You can submit your taxes online through the IRS’ secure server. You’ll have multiple options to make your payments, including credit or debit card, cash, PayPal, money wire, and more. You can also access options to schedule future payments through the Electronic Federal Tax Payment System (EFTPS).
Estimated Quarterly Tax Penalties
If you do not make estimated quarterly tax payments or do not pay enough tax throughout the year, you may have to pay a penalty. Generally, if you owe less than $1,000 in tax or if you paid at least 90% of the tax for the current year, you can avoid any penalties. Again, quarterly estimated taxes are just that: estimates. Do your best and make adjustments as you go to avoid additional costs.
How Vyde Can Help
If you have questions about estimated quarterly taxes or need help calculating how much you should pay, our team at Vyde would love to help! Our clients can easily schedule a time to meet with an accountant and tax professional to discuss your unique situation. Simply reach out to our team through the Vyde Dash. We look forward to hearing from you!
After a tight competition that included nearly 300 small business owners, Mazuma USA is thrilled to announce the winner of our first-ever $10K giveaway: Bruce Bassi, founder of TelepsychHealth.
Dr. Bassi started TelepsychHealth in 2018 to improve access to mental health services, providing patients with the resources, support, and help they need when and where they need it. Dr. Bassi’s goal is to improve the patient experience in a continuously changing industry.
“There are a lot of people out there in a lot of pain and suffering, isolated and alone, and they need a lot of help,” Dr. Bassi says. “They don’t want to focus on the challenges of finding a provider and paying for a session. They just want to get better.”
About winning the $10,000 grand prize, Dr. Bassi says, “We will set this money aside in an account to fund services for low income individuals who need care but cannot afford it. Being able to see low income patients will greatly aid our mission of providing highest quality care to those who need it the most.”
The runner up for the competition was Brandon Lunsford, owner of Garden Of Eden Floral and Tea Room. Lunsford says his family is in the business of “delivering smiles” and helping people celebrate memorable moments, and he plans to use his $1,000 prize to expand his business.
Mazuma USA launched their $10K giveaway to bolster small businesses making a positive impact in their community. The top six finalists in the competition were featured on our Keep Going podcast as we celebrated their stories of hard work and success.
More than 10,000 people rallied behind these businesses, casting their votes to determine who should win the grand prize.
“We were overwhelmed with the response and thrilled to see so many people supporting and rallying around small business owners,” says Greg Nielson, Mazuma USA co-founder.
“Thank you to all who participated in our giveaway,” adds Ben Sutton, Mazuma co-founder. “We are excited to announce that we will be launching another $10,000 giveaway this year, and we will continue to celebrate the real-life struggles and successes of entrepreneurs in our Keep Going podcast.”
For details on how to apply for Mazuma’s 2022 giveaway, visit mazumausa.com/contest.
To listen to the remarkable stories of business owners like Bruce Bassi and Brandon Lunsford, visit mazumausa.com/keep-going.
Many obvious perks come with owning your own business, including setting your own schedule, being your own boss, and having control over your career. But there are also many tax benefits business owners that can take advantage of to maximize their profits.
Here's a quick guide that covers important tax deductions for your business.
What Will a Deduction Save Me?
A deduction, or write-off, is a business expense that can help lower your taxes. For example, if your business made $75,000 last year but you invested $10,000 in new business equipment, you would deduct that $10,000 from your net income. That means when it comes time to pay your taxes, you would need to pay tax on only $65,000 instead of the full $75,000.
How much will that deduction actually save you on your taxes? It’s important to weigh out the costs versus tax savings when you’re making a business purchase. Sometimes the tax benefits of owning a business don’t outweigh the expenses involved with a deduction. Luckily, we have a simple formula that can help you see the value of these deductions:
Business Expense x Tax Rate = Money You Save on Taxes
For example, if you spent $2,000 on a new camera for your business and your tax rate is 25%, your savings would be $500:
$2,000 X .25 = $500
If you don’t know your tax rate, you can always visit IRS.gov to see the latest tax rates and brackets for the year. Keep in mind that if you are self-employed, you will also need to pay self-employment tax, which is a little over 15%.
Of course, you can’t write off every expense as a business expense. According to the IRS, you should write off expenses that are ordinary (i.e. common and accepted in your industry) or necessary (i.e. helpful and appropriate for your business). That doesn’t mean you can’t be creative regarding a tax deduction. Think broad. Just be sure you know and document the business purpose.
Common Business Expenses That Qualify For Tax Deductions
A great example of getting creative in maximizing your tax benefits for owning a business comes from a client I work with who wrote off her houseboat at Lake Powell. She is a photographer who takes senior graduation photos, and she also loves Lake Powell.
She came up with a promotional idea of taking a handful of her clients down to Lake Powell each year for an exclusive photo shoot. Because of these promotional trips, she decided to purchase a houseboat as a business expense. While she can still enjoy the houseboat throughout the year with her friends and family, the reason for purchasing the boat was to grow her business, which makes it a business expense. The chance to win a vacation to Lake Powell and the stunning photos that result from these trips help build her client base and generate more revenue. Overall, it’s a win-win!
This example illustrates that business owners should not feel limited in the deductions they take. Below, I have listed several common business expenses you should consider as tax deductions, but this is by no means a comprehensive list.
Business Travel
This includes plane tickets, transportation, gas, rental cars, meals, conferences, etc. If you have questions about what constitutes a business trip, check out our complete guide to writing off your vacation.
Business Meals
These include meals where you discuss business or meet with clients, partners, prospects, etc.
Retirement Contributions
Business owners have more flexibility that allows them to strategize around their retirement contributions. At the end of the year, you can determine how much you want to contribute to your retirement to help lower your taxable income. If you have questions, reach out to our team to develop with the best game plan.
Vehicles and Transportation
This can include purchases, leases, mileage, repairs, maintenance, insurance, etc. As we saw from the example above, it can even include houseboats!
Phones
This can include the initial purchase, repairs, and monthly phone bills.
Equipment
Some examples include tools, furniture, cameras, computers, monitors, printers, and machinery. Again, this can be broad depending on your business needs, so don’t limit yourself.
Depreciation on Assets
Depreciation on any capital under your name is fully deductible. Equipment, rentals, vehicles, and other depreciable items of contention are covered under a Section 179 deduction—up to $1,050,000 from new.
Inventory
One of the tax benefits of owning a business is that everything in your warehouse can be written off at the end of the year. This will be valid whether you’re producing these goods yourself or serving as a middleman.
Supplies
Do you need office supplies or marketing materials like brochures, business cards, or posters? What about cleaning supplies or hardware like memory drives, routers, or servers? Keep track of all these expenses because they are all great tax deductions.
Employee Expenses or Contract Labor
Whether you have employees or pay someone to help set up your office or website, you can count those payments as a deduction. In addition, any money you spend on business equipment, education, travel, meals, gifts, etc. for employees can be written off.
Insurance
This includes health insurance as well as business-related insurance expenses, such as data breach insurance, liability insurance, property insurance, etc.
Financing
If you finance expensive equipment, vehicles, or more for your business, you can write off the full purchase price of the asset using bonus depreciation in the year you financed it, even though it might take you years to pay off
Website and Software
Are you paying to maintain your website or domain? Do you use editing software, subscriptions, or Microsoft products for your business? Make sure you write those expenses off!
Education
Say there’s a seminar, class, or workshop that could help you gain important skills for your business. Take advantage of the learning opportunity and then take advantage of the tax deductions by writing off the expenses related to that education. That includes books, travel to and from seminars, meals purchased while attending a workshop, etc.
Taxes
Since you are self-employed, you will need to pay self-employment tax, which covers Medicare and Social Security taxes and is roughly 15%. While there’s nothing fun about paying extra taxes, you can deduct half of the self-employment tax to lower your tax bill.
Marketing and Advertising
This is another great area for thinking outside the box. You’ll likely have expenses related to ads, signs, logos, brochures, etc. but you could also sponsor community events, host a client retreat, or hold a promotional treasure hunt to build up your business.
Home Office or Rent
Whether you rent an office space or work from home, you can take advantage of tax deductions. With rent, it’s easy to calculate your business expense because you have a monthly bill. For a home office, that can get a little trickier. Check out our guide for getting the most from your home office tax deduction.
Utility Costs
One of the significant tax benefits of owning a business: Every single one of the utilities required to keep you in operation is totally tax-deductible. The only limitation? Double services—if you have a dedicated phone line for your business on-site, you can’t also claim this same deduction for your home line.
Interest
Any interest accrued on a small business loan, credit cards, or other borrowed money your business depends on can also be written off. As long as you, the owner, are legally liable for the debt, you should be good to go, making this one of the best tax benefits of owning a business.
Internet, Phone, and Other Bills
Water, heat, air conditioning, internet, phone, hotspots, monthly subscriptions for marketing tools or video conferencing—these could all be important for your business to function. Don’t forget to add those as tax write-offs.
Professional Fees
Do you have to maintain a license for your job? Or do you need permits to operate? Those are additional tax deductions you’ll want to take advantage of.
More Questions About Tax Benefits of Owning a Business?
Have additional questions about how to write off your business expenses and the tax benefits of owning a business? Reach out to our team for advice. At Vyde, we help small businesses save time, money, and stress by staying on top of their taxes and finances. We’d love to help you in any way we can.
Did you know you can deduct Halloween candy from your taxes? As a business, you can use Halloween candy as a tax write-off if you figure out a way to make it business-related.
Here are five ways on how to make Halloween candy tax-deductible this October:
Make a promotion out of it. Attach your business card or a promotional flyer to packets of M&M’s and voila! Deductible.
There are many companies that will print candy wrappers with your logo on it. This is a more advanced way to promote your business and still have something for trick-or-treaters.
Send a box of candy to potential or existing clients this October. These gifts help promote your business and build relationships that can boost your sales. It might also be a nice, unexpected (and early!) surprise for clients who might be expecting a Christmas card rather than a Halloween treat.
Donate any leftover candy to the US troops. Read more about that, here. “Charitable organizations with 501(3)c status like Operation Gratitude (EIN 20-0103575) and Soldiers’ Angels (EIN 20-0583415) collect leftover Halloween candy to include in care packages for soldiers. They are two of many 501(c)3 organizations on the IRS-approved list to donate tax-deductible charitable goods. Always be sure to check the IRS list before claiming your donations are tax-deductible, as status can change.”
Make it a party. You can deduct a portion of a Halloween party if the party is to conduct or promote business. Typically, this looks like an open house of some sort where you mingle with current and potential clients, play a few Halloween games, give out candy and treats, and discuss business. The IRS does not specify how much time you must spend discussing the business to claim a deduction, so party on!
The candy you purchase to stand at your front door and hand out to neighborhood kids is likely not tax-deductible. But hey, those little smiling monsters on your doorstep are worth the money, aren’t they
Entrepreneurs and small business owners are good at wearing multiple hats. They’re the marketing department, the production assistant, the CEO, the customer service rep, and much more. If you’ve been in business long, odds are you’ve learned quite a bit about finances (or you want to) and you might have even gotten pretty savvy at handling your books. However, doing it all starts to wear on you eventually, and it can even impact the growth and success of your business. Many entrepreneurs ask themselves the simple question, “How do I know when I need to hire a professional bookkeeper?”
Do I Need a Professional Bookkeeper?
A bookkeeper does the day-to-day, hands-on tasks so you won’t have to. If you’re asking yourself, “why should I hire a professional bookkeeper?”, consider all the tasks they would take care of for you. Make sure new employees file all the right paperwork for the business’s payroll, promptly submit and follow up on invoices, and pay bills. That’s just the tip of the iceberg.
Though you may still be at a point where you can handle all of that, so let us give you the warning signs of when you should finally tell yourself, “I do need a professional bookkeeper, this is too much.”
It Might Be Time to Hire a Professional Bookkeeper If. .
1. Your Books Are Never up to Date
We get that it’s hard to sit down and wade through the paperwork that makes up your company’s finances. But if your books aren’t up to date, you can’t be financially aware of where your business stands. That means you’re operating more on risk than you have to. Knowledge is power. Having your books up to date means you have the information you need to gauge the current health of your business and make smart, data-informed decisions.
2. Bookkeeping and Finances Take Up Too Much of Your Time
Running your business means you’ve got to keep tabs on a lot of different moving parts. We’re always impressed with the entrepreneurs and small business owners we work with; they can manage a lot. But it’s not worth running yourself into the ground and losing your passion for your business. According to a report by Sage, small businesses spend an average of 120 working days per year on administrative tasks. Another study found that a majority of entrepreneurs say the administrative burden of managing federal taxes is worse than actually paying taxes.
If you’re finding that you’re spending more time in areas that you don’t love (say the bookkeeping and invoices) and less time doing what got you started in the first place (customer service or creating your products), then it might be time to admit to yourself that “I do need to hire a bookkeeper”, and hand it over to a professional.
Look online to see what options are available. Be sure to take into consideration pricing and fees. There are many affordable solutions that can help you handle your bookkeeping and taxes for a flat monthly fee. You’ll have a better handle on what it might cost to hand your bookkeeping over to someone else and you’ll also know what you’ll be able to gain from using their services as well. That’s a win!
3. You Don’t Know What Your Cash Flow Is
If you’re still saying to yourself, “I still don’t see why I need to hire a bookkeeper”, there are two words to change your mind: cash flow. Cash flow is how much money you have moving in and out of your business at any given time. Knowing that number means you’ve got a good handle on the success and potential of your business. You’re aware of how much you’re spending and earning, and you’re keeping tabs on bills you need to pay as well as invoices you’ve sent out that need payment.
With a professional bookkeeper keeping track of your finances, you should have access to your cash flow number at any time. That might not be the case if you’re doing your books yourself or if they’re not currently up to date. Not knowing where you stand financially might not be hurting you, but it’s not helping you grow your business. A professional bookkeeper will provide you with financial reports and data that are essential to strategically expanding your business.
If you’re looking for a reason as to why you should hire a bookkeeper, bookkeeping is it. The time and resources saved by constant bookkeeping and detailed records are invaluable.
4. You Handle Your Books at the Same Time You Handle Your Taxes
Here are a few reasons you should consider doing your bookkeeping throughout the year, instead of during tax season:
Accountants or CPAs usually charge more per hour than a bookkeeper does. That means you’re paying more for them to do a task that could cost you more than half that much.
Books that aren’t up to date aren’t helping you make good business decisions and that means you’re taking more risks in your business. Having quarterly or monthly financial statements at your disposal means you can quickly track how your business decisions impact your bottom line.
Accountants who do retroactive bookkeeping don’t always provide you with month-to-month records. These detailed records are often necessary to secure loans, or attract investors, not to mention help showcase the value of your business if you’re looking to sell.
5. Your Sales Have Increased, You’re Busier Than Ever, but You Aren’t Making More Money
It happens more than you might think. Your business is growing, you’re busier than ever, but your net income is not growing or it’s tied up so you can’t invest it back into your business or pay it out to yourself or your employees. If your revenue is increasing but your bottom line doesn’t seem to budge that means you need to increase your profit margins.
The documents and reports that you’d receive from a bookkeeper will help show you where to cut costs so you can make your business more profitable.
For more details about profit margins and other numbers you should track as a business owner, watch this helpful video:
Do I REALLY Need to Hire a Bookkeeper?
The answer is, at the end of all this, it’s up to you. If you feel confident in your skills at managing all of those tasks for your small business, perhaps not. However, we strongly suggest not taking those signs lightly as, if left unchecked, they can leave huge negative impacts on your business. It’s better to ask the question, “Why should I hire a bookkeeper? Is it worth it?” than “Why didn’t I hire a bookkeeper? It would have been worth it!”.
1. Why should I consider hiring a professional bookkeeper for my business?
A professional bookkeeper can handle day-to-day financial tasks, such as payroll, invoicing, and bill payments, allowing you to focus on core business activities. They provide timely, accurate financial records crucial for making informed decisions, improving financial awareness, and managing risk effectively.
2. How do I know when it’s time to hire a professional bookkeeper?
Several signs indicate the need for a bookkeeper:
If your books are consistently not up to date, hindering your financial awareness.
When bookkeeping consumes excessive time that could be better utilized in core business functions.
If you lack a clear understanding of your cash flow, impacting your ability to gauge business success.
When handling books simultaneously with tax preparation becomes overwhelming and affects business decisions.
If sales are increasing, but your net income remains stagnant, indicating a need for profit margin analysis.
3. What benefits can I expect from hiring a professional bookkeeper?
By hiring a bookkeeper, you gain access to organized financial records, allowing you to make informed decisions, understand cash flow, and track business performance more effectively. Moreover, it can potentially save costs compared to hiring accountants for similar tasks.
4. How can a professional bookkeeper help improve my business’s profitability?
Bookkeepers offer detailed reports that enable you to identify areas to cut costs, enhance profit margins, and reinvest earnings back into the business. Their insights can guide strategic decision-making for sustainable growth.
5. What happens if I delay hiring a bookkeeper for my business?
Delaying hiring a bookkeeper may lead to financial disorganization, reduced awareness of the business’s financial health, missed growth opportunities, increased risk due to inadequate financial tracking, and potential difficulties in securing loans or attracting investors.
Furnishing an office is a necessary but expensive endeavor. Purchasing furniture for your office will make you wonder, is office furniture tax deductible? The Internal Revenue Service (IRS) understands that office furniture is a vital aspect of running a business, so they allow business owners to deduct those expenses from their taxable income.
What Office Furniture is Tax Deductible?
There are rules when it comes to deducting office furniture. First, the IRS only allows you to deduct $5,000 worth of furniture if you are just starting your business. Anything more could be considered capital costs. You also can only deduct furniture that is necessary and that is actually used in your business. This means it’s best that your office furniture stays at your office. You shouldn’t be buying something personal and writing it off as a business expense.
The following items can be claimed as office furniture or equipment expenses:
Desks
Chairs or couches
Coffee tables
Tables
Appliances (like refrigerators, microwaves, etc.)
Computers
Printers
Decorations
Phones
Televisions
Monitors
Speakers
This is not a comprehensive list. What qualifies as necessary furniture for your business depends on your industry, products, and services. If you are wondering if certain office furniture is tax deductible, ask yourself:
Is the item necessary for me to successfully run or grow my business?
Is the item something most businesses in my industry would need to function or operate?
If you answered yes to both questions, you can deduct the item from your taxable income. If you have specific questions about deducting office furniture, ask your accountant and they can determine what qualifies and how to categorize an item.
A lot of small business owners work out of their homes instead of an actual office. The IRS still allows business owners to write off their home office expenses.
If you’re working out of your home, you can claim the part of your house that you work in as your office. This means that you can write off part of your mortgage or rent as a business expense. You should calculate the square footage of your office and subtract that from the total square footage of your house to decide how much of your mortgage or rent you can write off. If you choose to write off your home office, it’s best practice to only use that space as an office. If you have other uses for the room then it’s not deductible.
You can also write off other normal business costs associated with using your home like trash removal, electric and heating, internet, snow removal, and other minimal repairs to your home that would affect your business. One thing you can’t include as part of your home office is a bathroom.
The office furniture rules apply to home offices as well, so if it is strictly used in your office, that office furniture is tax deductible.
If you have any questions or need help with your business accounting and taxes, reach out to our team! We would love to help you any way we can!
Frequently Asked Questions
Is office furniture tax deductible when starting a new business?
Yes, office furniture is tax deductible for new businesses, but there are limits. The IRS allows you to deduct up to $5,000 worth of office furniture in your first year. Any amount above this may be considered a capital cost, which requires different handling.
What types of office furniture can I deduct as business expenses?
You can deduct various types of office furniture and equipment, including desks, chairs, couches, coffee tables, tables, appliances (like refrigerators and microwaves), computers, printers, decorations, phones, televisions, monitors, and speakers. However, the furniture must be necessary for your business operations.
Can I deduct office furniture that I use both at home and in my office?
Office furniture must be used strictly for business purposes to be deductible. If you work from home, you can deduct furniture in your home office as long as the space is used exclusively for business. Personal items or furniture used for non-business purposes are not deductible.
How do I determine if an office furniture item is tax deductible?
To determine if an office furniture item is tax deductible, ask yourself: 1) Is the item necessary for successfully running or growing my business? 2) Is the item something most businesses in my industry would need to function? If you answer “yes” to both questions, the item is likely deductible. Consult with your accountant for specific guidance.
Are home office expenses, including furniture, deductible?
Yes, if you have a home office used exclusively for business, you can deduct related expenses. This includes a portion of your mortgage or rent based on the office’s square footage relative to your home. You can also deduct utilities and repairs related to the office space. Office furniture used exclusively in your home office is also deductible.
If your business goes too many years without making a profit, it can be classified as a hobby. When it becomes a hobby, you can no longer claim losses as business deductions. Any expenses associated with your business in an effort to make a profit may be deducted.
In order to determine if you are running a business or a growing hobby, the Internal Revenue Service (IRS) looks at the following qualifications:
Do you put in the time to turn a profit?
Have you made a profit in the past?
Do you have the necessary knowledge to succeed in your field?
Do you depend on the income from this activity?
Were your losses beyond your control?
If your business doesn’t turn a profit for 3 out of 5 years (except in specific industries, like horse racing) then it is classified as a hobby, according to the hobby loss rule, and you can no longer claim tax deductions against other revenue.
If you want to reverse the IRS’s decision about your business, then you have to prove your intention was to make a profit. Keep extensive files showing where you spent your money and how it was imperative to your business.
If you try to claim your hobby as a business then it could trigger an IRS audit. Only claim deductions if you are actually running a business. For more clarification on what constitutes a business or a hobby, the IRS has put out a helpful guide you may want to read.
Who Does the Hobby Loss Apply To?
The hobby loss rules work to prevent any hobbyists from taking advantage of the tax benefits of businesses. Business entities that the Hobby Loss Rule applies to are S-corporations, individual business owners, business estates, and partnerships. Most companies that possess the responsibilities for any liabilities incurred by the business that land on the owner of the business can be affected by the Hobby Loss Rule. C-corporations are exempt from the Hobby Loss Rule because of the adjusted gross income threshold of 2 percent for C-corporations.
Hobby Loss Rule Scenario: When Does the IRS Consider Your Business a Hobby?
To better illustrate the impact of the hobby loss rule, I have a scenario that many of our clients can relate to.
Janet is the blogger and owner of a lifestyle blog. She’s been blogging for 5 years. Over those years she’s claimed her blog as a business on her taxes. The first 2 years she did not make a profit. The third and fourth years she did bring in some money from her blog. This year Janet is hoping to make a profit again so that her blog isn’t classified as a hobby.
Janet’s blogging expenses for her fifth year in business were:
Website hosting
Website domain
WordPress theme
Purchased ad space on other blogs
Blogging conference tickets and travel expenses
3 online courses
Photoshop subscription
Janet brought in money from the following avenues:
Selling ad space on her blog
Several sponsored campaigns
Paid social media posts
Unfortunately, Janet’s expenses outweighed her income and she reported another loss. According to the hobby loss rule, her blog is now considered a hobby, not a business.
Janet still wants to run her blog like a business. She is going to try to prove that she ran her blog with the intent to make a profit. Janet will show that she intended to make a profit by attending a conference to increase her knowledge. She also kept strict records showing her business expenses. She can submit these to try and still claim her deductions.
The IRS will have to determine if Janet’s blog can still be considered a business, but her careful records will benefit her in making a case.
Prevent Your Business from Becoming a Hobby
If you are an owner of a newly established business, keep track of your business plans, receipts, and records. While we all hope to start turning a profit after the first few years in business, life can be unpredictable. Having these records in place can help you make your case that your business is a legitimate business, and you deserve the benefits that come with it.
If you need help with your business taxes or finances, reach out to our team. We specialize in helping small business owners save time, money, and stress on their taxes and accounting.
As a small business owner, there are many decisions you will need to make many decisions that will impact your company for years to come.
Among these decisions is which corporate entity is best for your business. In this blog, we will review 5 different types of business entities (single and multi-member LLC, C Corp, S Corp, Partnership, Sole Proprietorship) along with their advantages and disadvantages so you can decide which works best for your business.
Sole Proprietorship
Many small business owners form a sole proprietorship when they’re just starting out.
If you are a sole proprietor, this means that you own and operate your business by yourself. You have complete control. All the profits of your business are yours.
However, with a sole proprietorship, you have no liability protection, which means you are responsible for all losses and debts as well. If any legal issues arise, you will be held personally responsible and those debts will need to be paid from your personal account.
A sole proprietorship is one of the simplest and least expensive entities to form because no legal paperwork is needed. However, your city or state may require you to obtain a business license, so be sure to look into the requirements for your specific state. In addition, you will want to register your business name with your state.
When it comes to your business taxes, filing is quick and easy. You can file your business taxes with your personal taxes using a Schedule C form.
In addition, you can deduct expenses and losses from your business against any other income you might earn, which will lower your tax bill overall.
The one drawback about taxes for a sole proprietor is that you are expected to pay a 15% self-employment tax on all your net income, which covers Social Security and Medicare taxes.
You are also required to pay estimated quarterly taxes throughout the year. These payments are usually due April 15, June 15, September 15, and January 15. If you fail to pay estimated taxes quarterly, you may have to pay a penalty and interest on what you owe.
Overall, the advantages to forming a sole proprietorship are that it is the least expensive entity to form, you have complete control of your business, and tax preparation is quick and easy.
The biggest disadvantage is no liability protection.
General Partnership
A general partnership is simple to form. Like a sole proprietorship, your city or state may require you to obtain a business license, and you will want to register your business name with your state.
I’d also strongly recommend that you set up an operating agreement for your partnership. What are the roles and responsibilities of each partner involved? What percentage of the profits will you share? Determining this at the start will benefit your business as you get up and operating.
Like a sole proprietorship, a general partnership does not give you liability protection. This means each partner in the business is personally responsible for any debts or legal action.
General partnerships are also required to pay the 15% self-employment tax on all their net income as well as quarterly estimated taxes. However, as a partnership, you have a lot of flexibility and can deduct any losses in your business against other income to lower your taxes.
That’s where the similarities between a general partnership and a sole proprietorship end. Partnerships add more complexity because there are multiple owners involved.
In a partnership, you will file a partnership tax return every year on Form 1065. Then, each partner is given a Schedule K-1 showing their individual share of the profits and losses, based on your agreement. That means you will need to file a form as a partnership as well as the Schedule K-1 as part of your personal tax return.
Single Member LLC vs Multi Member LLC
The main two types of LLCs are single member LLC and multi member llc. Comparing single member LLc vs multi member LLC, you want to account for how many owners are involved in the business. More of the similarities and differences between these two business structures are discussed below.
Single-Member LLC
A limited liability corporation, or LLC, is more expensive to form than a sole proprietorship.
An LLC must be registered in the state where it does business. Each state varies slightly, but most require you to choose a distinct name and to file articles of organization. These articles of organization include information like your business name, address, and the names of its members. Many states charge a filing fee for the articles of organization. For most states, you file with the Secretary of State; however, each state is different, so carefully check the requirements in your state.
Unlike a sole proprietorship, an LLC offers liability protection, which means your business assets are separated from your personal assets. So, if your business is sued or runs into financial trouble, the business will be responsible for paying any fees, not you personally.
In addition, with a single-member LLC, you have complete control and flexibility. All the profits of the business are yours, and you can deduct any losses in your business against other income to lower your tax bill.
However, like a sole proprietorship and partnership, you will be required to pay self-employment tax on all of your net income to cover Social Security and Medicare taxes, unless you elect to be taxed as an S corporation. You are also required to make estimated quarterly tax payments.
As a single-member LLC, you can elect to be taxed as a sole proprietorship or as an S corporation, which we will discuss in more detail below.
Multi-Member LLC
A multi-member LLC shares many similarities with a single-member LLC. For example, you get the same liability protection. You also go through the same formation process and file documents with your state. And you can elect to be taxed as an S corporation.
The main differences between a single-member and multi-member LLC revolve around the fact that multiple business owners are involved. Because of this, you can not elect to be taxed as a sole proprietorship. Your LLC will need to file a business tax form and each partner will need to fill out a Schedule E on their personal tax return, unless you elect to be taxed as an S corp, which we will discuss below.
In addition, some complexities arise with sharing control of the business, which is why you will want to have an operating agreement in place.
S Corporation
S corps have the benefits of a corporation but are taxed as a partnership. Like an LLC, an S corp separates business owners and their assets from the business. Creditors can only go after the business but can’t touch the business owner’s assets.
However, establishing an S corp takes more leg work and paperwork than an LLC. Most S corps spend a considerable amount on attorney and accounting fees.
An S corp also requires more maintenance. For example, to be an S corp, you must develop a board and bylaws, issue stock, hold board meetings, and keep records of each board meeting.
In addition, the IRS also has the following requirements for S corps: 1) shareholders must be US citizens, 2) you cannot have more than 100 shareholders (spouses count as separate shareholders), and 3) you can only have one class of stock.
The taxation of an S corp is what sets it apart from other business entities. When you have an S corp, your business is taxed through the shareholders’ income, and those taxes are taken out throughout the year.
Any shareholder who works for the company must be paid a reasonable wage. After the wages are paid, the rest of the income from the business is passed onto the shareholders as dividends. The benefit of an S corp is that dividends are taxed at a low rate if they are taxed at all. An LLC taxed as an S corp can also take advantage of these benefits.
To take advantage of these tax benefits, you are required to set up payroll for your owners and employees. The laws for S corps are not the same in each state, so you will want to look into individual requirements for your state.
C Corporation
Unlike an S corp, a C corporation protects the small business owner or owners by acting as a fiduciary barrier between the income a business brings in and the progenitors and stakeholders responsible for its operations as executives.
While S corps are considered “flow-through” entities, C corps are not. C corps exist separately as a taxable party in the eyes of the government. This “double taxation” notion is the key reason many small business owners opt to establish themselves as LLCs or S corps instead.
The decision between LLC vs. S corp vs. C corp vs. partnership is often fraught with pitfalls. While many publicly-traded companies are C corps on the books, this classification is typically only chosen by those with the means to dodge double taxation at the end of the year. Two common examples are lawyers at the helm of their own firms and doctors in private practice.
So, which entity works best for your business?
Unfortunately, there is no simple answer. Depending on your business, industry, structure, and revenue, different benefits might outweigh some of the disadvantages.
In addition, what entity works best for your business might change as your business grows. So the best advice I can provide is to know these pros and cons. Then, as the complexity of your business increases, seek the advice of experts who can analyze what works best for your situation. Paying extra for expert insights now can have significant payoffs in the long run.
If you want customized insights into your business, reach out to our team! We would love to help. We specialize in small business accounting, bookkeeping, and taxes, and we enjoy having ongoing discussions with our clients to help them make decisions that will lead to their business success.
What If I Don’t Have Receipts for Last Year’s Business Expenses?
It’s tax time and you don’t have receipts for last year’s business expenses. Now what?
You can still claim deductions on your taxes without receipts for every transaction. Keep in mind that you don’t have to send your shoebox full of receipts to the IRS. You’ll only need them if you’re audited (which can happen up to 6 years after filing your taxes). However, it’s best to find documentation of every deduction you plan to take now rather than risking not having records if you’re audited a few years down the road.
If you don’t have original receipts, other acceptable records may include canceled checks, credit or debit card statements, written records you create, calendar notations, and photographs.
The first step to take is to go back through your bank statements and find the purchase of the item you’re trying to deduct. Print it out or save a file and make a note of when and where the item was bought, as well as how much you paid for it.
When it comes to travel expenses and business trips, if you don’t have receipts, you’ll need to do the same thing. Review your credit card statements, mileage logs, and calendar notations for records. For more information about what you can deduct when it comes to business travel, check out our detailed business trip deduction guide.
For other business-related purchases without records, it is wise to take a picture of the item purchased then write down where you bought it and how much it cost. If you know the name of the store, look up the item on the store’s website and write down the cost or take a screenshot of the listing.
Another way to account for lost receipts is to show a pattern of spending. If you started keeping records for your office’s monthly staff lunches halfway through the year, you could use your average expenses for those months to estimate the expenses for the months you didn’t track.
If you are trying to gauge how long to keep these records, here is a helpful guide:
Unfortunately, there is no perfect way to make up for original lost receipts. However, with today’s technology, you leave a record of spending everywhere you go. If you find yourself in the situation of not having last year’s receipts, vow to create a more organized tracking system from here on out so that you don’t run into this problem in the future. Here are a few ideas on tracking receipts for your small business this year.
If you are looking to eliminate the headache of your business taxes, reach out to our team. We help over 10,000 businesses across the US manage their bookkeeping and taxes. We would love to help!
FAQs: Handling Business Expenses Without Receipts
1. Can I still claim deductions without receipts?
Yes, you can claim deductions even without receipts. Alternative records like canceled checks, bank statements, written records, calendar notations, and photographs are acceptable.
2. How do I document purchases without original receipts?
Review bank statements or credit card records to identify purchases. Note down details like dates, amounts, and vendors. For travel expenses, utilize credit card statements, mileage logs, and calendar notations.
3. What if I can’t find records for business-related purchases?
If records are unavailable, take a photo of the item purchased and note the details. If known, retrieve information from the store’s website or use spending patterns to estimate costs.
4. How long should I keep records for tax purposes?
Refer to a helpful guide such as KeepItFor-01 for record retention guidelines. It’s crucial to maintain records for the recommended duration to ensure compliance.
5. How can I improve record-keeping for future tax seasons?
Invest in digital tracking systems and vow to maintain organized records to avoid similar issues in the future. Consider ideas for tracking receipts to streamline your small business’s financial management.
Running your own business is rewarding, but it can also be overwhelming. There are dozens of administrative tasks to keep tabs on besides your day-to-day work. I’ve been there, and I’ve felt that nagging feeling that I am letting something important slip through the cracks.
That’s why I wanted to put together these tips to help you stay on top of your finances while growing a successful business.
1. Plan for Current Business Needs
First, let’s talk about the importance of a business plan. How does an idea develop into a fully functioning business? It takes vision, work, and a good plan. To reach any destination, you need a good map. For entrepreneurs, we call this map a business plan.
Some essentials of a business plan include:
Researching competing products
Determining what sets your company or product apart
Conducting research into your market and client base
Estimating your costs and profit margin
Creating a marketing plan
Strategizing around how to pay yourself, your taxes, and other expenses
While there is a lot we could cover on the topic of business planning, for today we are going to focus on 3 important financial elements.
Tax Planning
Calculating tax rates can be tricky for small business owners. In addition to paying taxes on their income, many small business owners need to pay a 15% self-employment tax—which covers Social Security and Medicare taxes.
Because of this, I recommend that most business owners set aside 25% to 30% of their net income for taxes. Your net income is how much you make after you factor in all your expenses, so it’s your income minus any business expenses.
For example, if you earned $10,000 one month but spent $500 on new equipment, $250 on marketing, and $1,000 attending an educational conference, you would set aside 25% to 30% of $8,250 (your income minus all those expenses), not $10,000.
Expense Planning
How much will it cost to keep your business running? This should be something you evaluate and update regularly.
From marketing and production costs to rent and employee salaries, the expenses your business needs to keep functioning will be unique. Carefully think through any tools, equipment, and resources you need for your business. Once you’ve determined the estimated time and expense you will need to put in to your business, triple it!
No matter how carefully you plan, life happens and unexpected expenses will occur. Make sure you have enough wiggle room in your budget to handle the complications that will come your way.
Succession Planning
Setting up a succession plan includes planning for changes in your company and developing future leaders. Although succession planning doesn’t directly relate to finances, it can impact your financial planning and liability.
Think about and plan for how your business will continue to function if a key owner, partner, or employee leaves. Document processes and keep records so that if changes do occur, you still have the information you need to keep your business running smoothly.
2. Plan for Future Business Needs
Though there is a lot of uncertainty that comes with starting a business, begin with a long-term mindset by planning for the future success and growth of your company. Here are a few financial tips that will help you start on the right foot.
Set Up a Safety Net
Protect yourself and your investments as a business owner. Once your company begins generating revenue, set aside enough money to cover 2 to 12 months of expenses. Markets can change quickly. Having an emergency fund set aside will ensure you can keep your business running if an unexpected dip occurs or if you need a buffer to figure out new solutions.
In addition, diversify your investments as well as your markets. Having a diverse portfolio will protect you from sudden drops in any revenue source.
Plan for Retirement
Business owners have additional flexibility when it comes to their retirement contributions. Instead of being tied to a fixed percentage, you can adjust your retirement contributions to help lower your tax bill or bracket.
As you near the end of the year, talk to an accountant or a financial advisor to maximize your retirement contributions and tax savings. You can always reach out to our team for guidance about what is best for your specific situation. We would love to help.
3. Prioritize & Delegate
Small business owners are go-getters. But while we would love to do it all, we have to recognize that doing it all isn’t good for our sanity or our business.
Be smart about how you use your time. A survey by Sage showed that businesses around the world spend an average of 120 working days per year on administrative tasks, which impacts productivity and profitability. For small businesses, that number can climb even higher.
The takeaway is that the more time you spend figuring out books the less time you have to focus on growing your business. Find ways to lessen that burden so you can focus on what makes the biggest impact.
As a business owner, you will find there are a million and one things you can focus on in a day. Use your business plan to set a few realistic goals each month or each year. Then, use those goals to set your priorities.
Once you know your priorities, figure out what you can delegate or outsource. Find trusted partners or companies that can help you maximize your time.
4. Maximize Your Tax Benefits
There are several perks that come with owning your own business, including tax deductions. Take advantage of these benefits and understand how these deductions can impact your expenses in the long run.
You might be wondering, “How much will a tax deduction really save me on my taxes?” It’s important to weigh the costs of a business expense versus the actual tax savings to decide if that purchase is worth your money.
Luckily, we have a simple formula that can help you see the value of these deductions:
Business Expense x Tax Rate = Money You Save on Taxes
If you don’t know your tax rate, using 25% to 30% will give you a close estimate.
Once your plans and goals are in place, review them often. I’d suggest keeping a printout of your goals someplace you can see them as you work.
When you start to feel overwhelmed, look at your goals and focus on what you can do today that will get you closer to accomplishing those goals. That will help you tackle what matters most.
In addition to reviewing your plans, review your financial reports often. Get familiar with these reports and learn what they mean and how to read them. These will help you budget, make projections, secure loans or funding, and build a foundation for financial success!
If you still have questions regarding your business finances, taxes, or accounting, reach out to our team at Mazuma USA. We help small businesses save time, money, and stress managing their bookkeeping and taxes, and we would love to help you!
FAQs for Managing Business Finances:
Why is a business plan essential for financial stability?
A business plan outlines your vision, market research, costs, and strategies, crucial for financial stability and growth, offering a roadmap to success.
How should small business owners approach tax planning?
Set aside 25% to 30% of net income for taxes, considering self-employment tax. Deduct expenses from income and allocate a percentage for tax obligations.
What considerations are vital for expense planning in businesses?
Regularly evaluate and anticipate expenses, accounting for operational costs, marketing, salaries, and unexpected events, ensuring financial resilience.
Why is succession planning important for business owners?
Succession planning ensures continuity amidst personnel changes, safeguarding operations and financial stability by documenting processes and preparing for transitions.
How can business owners maximize tax benefits effectively?
Understand tax deductions and their impact on expenses. Utilize a simple formula to estimate tax savings and explore common deductions like business travel, equipment, and retirement contributions.
Dr. Bassi started TelepsychHealth in 2018 to improve access to mental health services, providing patients with the resources, support, and help they need when and where they need it. Dr. Bassi’s goal is to improve the patient experience in a continuously changing industry. 
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