From Elise Dobson
Store Management
September 20, 2023
Reading time: 15 minutes
How Taxes Affect Your Business
Every small business owner in the United States needs to pay taxes. While the exact amount you will pay varies from state to state and depends on your business structure, taxes are one of the largest costs associated with running a retail store. A small business retail store pays a tax rate of 19.8% on its income.
In addition to being one of the largest business expenses, taxes are also one of the most important bills. Small business owners who file inaccurate or late tax returns, or neglect them altogether, face penalties – or in severe cases, criminal prosecution.
The good news? Taxes for small businesses are not as complicated as you might think. A Certified Public Accountant (CPA) can help you reduce your tax liability so that you don’t end up with a hefty bill to pay at the end of the year.
15 Tax Tips for Small Businesses
The last thing you want to feel is confusion when tax time comes around. Here are 15 tax-saving tips to help you prepare and manage your small business accounts throughout the year.
1. Know Your Financial Terms
Many taxpayers feel like they need a new dictionary to understand their tax returns. The world of accounting comes with its own specialized terminology. Spend some time learning the terms that will help you understand your business’s financial situation.
Here’s a quick explanation of some common terms you may see on your financial statement:
- Revenue: The amount of money earned from product sales.
- Cost of Goods Sold (COGS): The cost of producing the products you sell in your business.
- Gross Profit: The money left after subtracting the cost of goods sold from total revenue.
- Net Sales: The gross profit you achieve after deducting all expenses from total revenue.
Lily Will, founder and CEO of NiaWigs, puts it into practice, “Small business owners often overlook the difference between their net income and gross income.”
“For example, if your product costs $100 to produce and sells for $150, your net profit is $50. However, after deducting your expenses, your net income could be as little as $10. So it’s essential to understand both gross and net profits to increase profitability and grow your business,” Lily says.
2. Separate Business and Personal Finances
The first thing you should do when starting a small business is to open a new bank account.
One of the easiest ways to run into tax trouble is to record personal expenses as business expenses. The more you keep your tax records for personal and business separate, the less likely the Internal Revenue Service will find anything wrong with your records. Daniel Keen, founder of The Ridge Wallet
Having separate bank accounts for business and personal transactions makes tax time easier. You will have clean, accurate records of the expenses you are reporting, and personal transactions will remain confidential.
3. Keep Accurate Records
When it comes to clean data, it will be easier to navigate tax season if you have accurate reports. Pull bank statements to reconcile income and expenses with receipts or invoices. You can use accounting software that does this on your behalf (we’ll talk about that later), or a free tool like Shopify’s invoice generator.
Free samples are a common expense that is mistakenly recorded, as Dan Luthi, partner at Ignite Spot, explains, “Sometimes people will modify it and label it as inventory shrinkage when it was actually a marketing expense.”
Ensuring it is reported correctly in your financial statements is crucial. It helps you understand how comparable your business is, so when you are assessing the year in preparation for taxes, people are looking at the correct information. Know what you are actually using for marketing expenses versus just inventory adjustments. Dan Luthi, Partner at Ignite Spot Accounting Services
As
Credit card points are often recorded incorrectly. Scott Sharff, CEO of Acuity and Catching Clouds, says, “When you purchase a million dollars in inventory, that’s a huge amount of points. And when small business owners go on vacation, they can go and travel first class all the way – everything is fully covered by points.”
“Very few people track reward points as company profits. The only time that will show up is in an audit. That should be listed as income.”
4. Use Accounting Software
Are you still using a spreadsheet to manage your small business taxes? The risk of errors increases significantly. Human mistakes can make tax filings inaccurate – an issue you never want to deal with.
Dan adds, “Excel will not give you perfectly accurate information. It won’t generate your financial statements for you. It won’t tell you who your largest suppliers are or what you’ve purchased from your largest suppliers this year.”
You should not file your company tax return without consulting a specialized tax professional or using software that can assist you in calculating deductions. Jared Smith, CEO of Joy Organics
Accounting software exists to solve those problems. Platforms like QuickBooks, Xero, and Sage integrate with your e-commerce store – saving time and reducing errors while automatically generating reports that help you understand the financials of your business.
5. Pay Estimated Quarterly Taxes
The IRS requires small business owners who expect to owe more than $1,000 by the end of the financial year to make quarterly payments. Estimate your tax bill for the end of the year and contribute to your year-end accounts by submitting Form 1040-ES on these dates: April 15, June 15, September 15, January 15
“This is important because there is no withholding tax on business income that passes through your individual return,” says Tim Yoder, tax analyst and accountant at Fit Small Business. “Sole proprietorships reporting business income on Schedule C must make quarterly payments that include both self-employment tax and income tax.”
6. Set Aside Cash for Payroll Taxes
As a small business owner who employs staff, you have a legal obligation to report, withhold, and pay employment taxes.
There are different types of taxes to consider for each employee: Social Security tax: Employers pay half (6.2%) of the employee’s earnings. Medicare tax: Employers pay half (1.49%) of the employee’s earnings. Federal income tax: Varies based on their salary and personal expenses.
Payroll applications like Gusto, ClockedIn, and Homebase can help you manage payroll and pay employment taxes. You’ll see when payday approaches, track employees’ working hours, and comply with employment laws, all in one dashboard.
People who use payroll solutions that require less involvement – often miss the opportunity to know their obligations with those businesses and who they owe money to, whether it’s to the federal revenue service, state, or their benefits organization. Dan Luthi, partner at Ignite Spot Accounting Services
7. Accurately Track Inventory
Another measure you’ll see on your small business tax return is the value of inventory – the cash amount you have tied up in unsold inventory.
Sellers must “determine the cost of goods sold during the year,” says Tim Yoder, tax analyst and accountant at Fit Small Business. “Doing this calculation manually takes a lot of time and is prone to errors. Invest $50 to $80 a month in a quality accounting package with inventory accounting, like QuickBooks, Zoho Books, or Xero.”
In addition
the other hand, additional depreciation allows you to spread the deduction over several years, which can help level out your tax liability over time.
It’s important to note that for both section 179 and additional depreciation, you must keep thorough records of your equipment purchases and usage. Consulting with a tax professional to navigate these options can also be beneficial.
For example: a high-quality security system costs $50,000. Instead of deducting that in the first fiscal year using Section 179, you might see additional depreciation allowing you to deduct $5,000 for each year it is used.
The main advantage of additional depreciation is that there is no limit. Riley Adams, a certified public accountant and founder of Young and the Invested, says, “It can create a net loss, allowing you to offset future taxable income.” Depreciation is not a real expense that comes out of your checking account.
13. Apply for the Qualified Business Income Deduction
“Starting from the 2018 tax year, a new law allows a new 20% tax deduction on your qualified business income, which reduces your taxable income,” explains Jill Rosen, CPA, PC.
There are many provisions that change your qualifications for this deduction, including the type of service you provide, your income level, the wages you pay, and/or the assets you own. Traditional retailers may qualify for this tax deduction.
14. Prepare for Tax Season Early
Tax season is a stressful time for many business owners. But it doesn’t have to be. By organizing your financial matters before tax time arrives, you will meet (or exceed) deadlines—rather than scrambling to reconcile a bank statement from six months ago.
Here are two important dates to put on your small business tax calendar: March 15: S corporation and partnership tax return April 15: Individual or single-member LLC tax return
Sarah York, an enrolled agent with the IRS and a writer at Keeper Tax, advises, “The best time to think about taxes is mid-November. The bigger year is over, so you can get a realistic picture of your tax situation while there’s still time to plan for it.”
“This window of opportunity is when the most effective strategic tax planning occurs, so make sure to put it on your calendar now! Once the year is over, even the best accountant won’t be able to do much.”
15. Hire an Accountant
Dan says, “Small business owners often don’t go into business to be accountants. They went into business to make money. They entered business to sell something they love and feel passionate about.”
Get some free time to focus on other parts of your business and offload your tax filing to an accountant—a person who can provide personalized tax advice based on your business structure. Corporations, sole proprietorships, partnerships, and LLCs all have different requirements for tax preparation and filing, making it difficult to find suitable advice for everyone online.
But with over 1.44 million accountants, CPAs, and bookkeepers to choose from, Scott Sharpe also recommends selecting an accountant who understands inventory-based businesses.
“You want to make sure they understand cash versus accrual for inventory-based businesses. And consider whether they use cost of goods sold versus purchase cost, which can significantly impact business profitability,” he says.
Dan continues, “But if your accountant handles it, they might say, ‘Wait, what’s cost of goods sold? Why didn’t you transfer this to the budget?’”
Make Your Taxes Correct
Tax season is a stressful time for small business owners who are filing, preparing, and paying their own taxes.
Use these tips to prepare yourself for the upcoming tax season. Whether you’re checking if your business tax deductions are allowed or consulting an accountant about tax laws in your state, the best time to start planning is now.
Stay
Stay on Top of Your Finances
With Shopify POS, it is easy to create reports and review your finances including sales, returns, taxes, payments, and more. Viewing your financial data across all sales channels from the same easy-to-understand back office is simple.
Note: This guide is provided for informational purposes only and is not intended to replace obtaining accounting, tax, or financial advice from a professional accountant.
Source: https://www.shopify.com/retail/small-business-tax-tips
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