Taxes for small businesses can be confusing, especially for new business owners. However, it is best to remember that there are many options for tax relief. This article will guide you through tax relief options that you may know of.
Small Businesses vs. Self-Employed
Before you start looking into tax relief options, one has to make the distinction between small businesses and self-employed. While both are small businesses, the two are very different in terms of how they are taxed.
A self-employed person is the owner of a business, and they bear the responsibility of paying their taxes. Furthermore, they will have to decide how the company will be run, including how much to spend. Some benefits of being self-employed include the freedom to do what you want with your business, take risks, and have an overall sense of satisfaction.
Small businesses, on the other hand, are when you have your employees or contractors. You will have to oversee their taxes and ensure that you provide the required benefits.
How Much Tax Should Small Businesses Pay?
The amount of tax you pay depends on how much money you made in the previous tax year. Many small businesses use their previous year’s tax returns and simply amend them according to the current tax year. This is known as a ‘previous year adjustment’, and it can save a lot of small businesses a lot of money.
On the other hand, some businesses calculate from scratch. However, a mistake businesses make is not doing tax relief in areas where they can.
How Can We Lower or Avoid Paying Taxes?
There are several things you can do to lower or even avoid paying taxes. Some of these methods are:
1. Deducting Travel Expenses
If you have business trips, whether one-offs or regular ones, you can deduct travel expenses. This cannot be done with personal travels, however.
2. Employing Family Members
By employing family members, you get off from paying social security and even Medicare. However, this still varies depending on the specifics of the situation.
3. Starting a Retirement Plan
You can establish a retirement plan and deduct this from your tax return. This can include a 401k, a traditional IRA, and a self-employed plan. Furthermore, the contributions you make are tax-deductible.
Declaring as an LLC
Many small businesses are run as sole proprietors or corporations. However, there are some small businesses that are set up as limited liability companies (LLC). This is also advantageous since small businesses that are set up as LLCs are treated as pass-through entities. They are usually taxed at the owner’s individual tax rate.
How Are LLCs Not Paying Taxes?
LLCs are not exempt from taxes, but they are not taxed at the corporate rate. In fact, an LLC is taxed at the personal tax rate of the owner, which is a lot lower. How so?
First, they do not pay the business income tax at the corporate tax rate. Second, the personal income tax rate is lower than the corporate tax rate. Third, the income received by the LLC will be taxed in a pass-through manner, so it will not be taxed twice.
Taxes are a part of running a small business, but know that there are different tax relief options that you can utilize. It is also important to understand your tax situation so you can save on taxes when possible.
To get some tax relief help, you can talk to Axiom Tax Resolution Group. Based in Birmingham, we are tax professionals ready to help you find the best solutions for your tax issues. Contact us today to get started.