How Will My Taxes Change Now That I Have a Business?Sep 12, 2022
One of the toughest transitions from employee to entrepreneur is taxes. Most business owners have no idea what to expect. There are a few key ways that your taxes will change because you started a business.
First, you no longer have taxes withheld automatically from your paycheck. This means that you are responsible for making estimated tax payments throughout the year. These payments are due on April 15th, June 15th, September 15th and January 15th. You are expected to keep track of your profits and estimate the amount you need to pay to ensure your profit has taxes paid on it by the end of the year. If you do not pay these, an underpayment penalty may be assessed. Make sure to speak with your tax advisor on how, when and how much to pay.
You will also need to file a Schedule C with your personal taxes to report business income and expenses (assuming you are a sole proprietor or single-member LLC). You are taxed on the profit (income after expenses) of your business, so you can begin utilizing strategies to maximize those expenses you can claim to result in paying less taxes. You will have to add this Schedule C to your personal tax return. You can still file a joint return with your spouse, so this does not affect how many returns you have to file. You only need to file an additional business tax return if you elect to be taxed as an S Corp, C Corp or Partnership (multi-member LLC).
Business owners are also typically subject to self-employment taxes. This includes Social Security and Medicare taxes. This means you will be responsible for paying an additional 15.3% tax on top of your income tax on the profit of your business. This accounts for the employee and employer share of payroll taxes. This usually catches new business owners off guard and leads to heavy tax bills.
There are lots of advantages to having a business, and tax savings possibilities are a major draw. Because you are taxed on the profit of your business, there are many creative ways to convert what would normally be personal expenses into business expenses and not pay taxes on those dollars. One example is the home office deduction. As a business owner, you can deduct from your income a portion of the costs to own and maintain your home because your business uses a part of it.
Because your tax savings opportunities increase as well as your tax paying responsibilities, I highly recommend working with a professional instead of an out-of-the-box software to file your income taxes. You will want the advice of a pro to help navigate these new requirements.