The basics of paying taxes on a home business
Having a home business is great. You can take a break to have lunch with the kids and be there for those special moments that you would have otherwise missed. Not to mention that there is no better way to beat the commute than to work from your home. But unfortunately there are some technicalities and legality issues that you cannot ignore. When you work outside of the home your employer is most likely going to be the one who worries about taxes, you just file your information by April 15th right? Well, it is not that easy when you are your own boss. If you do not take care of your finances and pay your taxes the way the law mandates you will have no one else to blame but yourself.
Technically, the IRS certainly expects quarterly payments of your estimated tax throughout the calendar year. By April, the IRS will also need to receive a complete accounting of your business proceeds, expenses, and any additional tax owed. This is no child's play, but you can learn what you need to do and seek the advice of experts to make sure that you do your part correctly.
|
|
- Keep excellent records - If you run your own home business, you must keep pristine records of your income and expenses. Often times this means knowing or learning how to create spread sheets or use accounting software.
- Plan for a home office deduction - One of the few tax benefits that you will want to make sure that you receive full benefits for is the home office deduction. In order to use this deduction to your full advantage you need to again keep excellent records of the expenses associated with running your home business. Fortunately the Schedule C on the federal tax forms where home office deductions are recorded has been simplified over the years. So as long as your records are good and you can prove that the expenses you claim really were for the sole use of the business you will be set. Just to give you an idea for the kinds of records that you should be saving, a home office deduction entails deducting a portion of your rent (or mortgage if you own your home) and utilities that account for your home business use.
- Hire an accountant - Many times it is better to pay an accountant fee and not have to worry about figuring out your business taxes on your own. After all, you are running a business and many times you will simply not have time to research out all of the things that will need to be included in your tax forms. Plus, it is always better to file your taxes correctly the first time than to be handed fines or even audited unnecessarily.
- Don't count on using standard tax return software - Paying taxes on a home business is more complicated and includes more variables to be included in the same category as those who had previously simply filed a 1040EZ return. You need to study the tax laws and take the time to understand the complexities of your return. The IRS sees a great deal of small business tax returns that are filled with these overly simple programs and more often then not your file could be flagged as one that was likely not done correctly.
- Be honest - When it is your business and you have sole access to all the money and money making decisions (including what you will claim as home office deductions and what you will recognize as mom-business expenses) it is tempting to mislead or pad the numbers in your favor. After all, no one want to pay taxes right? But you will almost always be better off in the long run for representing your expenses honestly (and you will feel better about yourself too).
