Today we have a special guest, it’s Josh Bauerle from CPA On Fire. With tax season around the corner, we are lucky Josh was able to talk with us. Josh started his business 3 years ago. At first he was focused on small business owners and entrepreneurs, but now the focus is online business owners. Josh is our CPA and the CPA for Entrepreneurs on Fire, hence the name.
We asked Josh what the number one thing is that we need to do when it comes to setting up a business for tax purposes. Josh says that record keeping is the first step. Having a system in place to track all of your spending is always necessary. It can be bookkeeping software, a simple spreadsheet, or you can outsource, but the system needs to be in place. The tracked expenses also need to be put broke down into proper categories. Office expense, travel, meals and entertainment, and advertising are some of the expense categories to keep in mind.
Actually knowing what is a write off also plays a big part. You can’t write off regular clothing like a suit or things that affect your appearance like a haircut. When it comes to saving meal receipts, you don’t have to save small receipts under $75, but having them never hurts. Larger amounts definitely need to be saved. If you have a $300 receipt, save it or take a picture with your accounting app and jot down some notes about the type of business that was discussed during the meeting.
When it comes to understanding your expenses, you can do it yourself or hire someone to take care of things. There are a lot of great accounting and bookkeeping software options available. Cloud options make it easy to take pictures of receipts and give your tax accountant access to the records. Software options also make it easy to run reports. If you have a bookkeeper or accountant, be sure to have quarterly or monthly meetings.
If you are just setting up a new business, setting it up as an LLC is a good option. For tax purposes a sole proprietor and an LLC are taxed the same, but an LLC can be taxed as an S Corp. Once a business hits a threshold of $30,000 net, the LLC taxed as an S Corp is a good option. Regardless of what type of entity you set up, the taxes are still passed to the owner unless you have a C Corp.
Small businesses are supposed to start paying quarterlies when they have $1000 in tax liability. To avoid tax penalties, your quarterly payments can be the amount of tax liability you had in the previous year. If you want to avoid a large tax payment at the end of the year, you can estimate your taxes and divide that up into quarterly payments.
We also talked about 1099’s, W2s and W9s. If your business does contract work for another business they may request a W9 form. S Corps and C Corps don’t have to issue a W9, but other businesses can just save one form and send it to all of the requests.
Small businesses also need to distinguish between employees and contractors. An employee fills out a W2 form, and the employer is responsible for half of the social security and medicare taxes along with unemployment and workers comp insurance. A contractor is someone who you pay to accomplish certain tasks. You have less control with a contractor, and you just pay them for the work or tasks accomplished. If they are in the US and earn over $600, have them fill out a W9, so you can send them a 1099 at the end of the year.
Josh recommends holding about 20-30% of your business income for taxes. He also says to keep in mind that taxes just pass through these entities and the owner still pays the taxes on income. He also doesn’t recommend C corporations for small businesses unless they plan to take on shareholders. When it comes to filing taxes, married people have to file as married and filing jointly is usually the best option.
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