Not quite sure how much you need to save for small business tax? There are many ways to go ahead calculating what you actually owe and saving the right amount.
The right method to use would depend on how long you have been in the business, how stable the income, how willing you are to crunch the numbers, etc.
Now, if your business is losing more than it is making, you need to pay tax! Moreover, if your business is making money, here’s how you can save in this tax season.
Hiring experienced professionals offering tax services can be of great help.
First Step: Get Clear On Your Tax Obligations
In the guide, we have come up with methods that would help you set some money aside for the taxes your business actually owes. It means your self-employment tax as well as income tax that you and your business, most likely pay the IRS on a quarterly basis.
When you hire employees, you would need to deal with employment taxes. But the federal taxes are just a tax pie. Also depending on the nature of your business, you might have to pay a variety of local and state taxes.
For instance:
- Sales tax: Most of the states actually charge you sales tax that you collect at the time of making a sale.
- Franchise tax: If you have sales tax nexus in any state, the state might charge you a franchise tax. But how this tax would be calculated differs in every state.
- Property tax: Charged on real estate you or your business operates, property tax actually varies state by state.
But you need to consider that this list is not comprehensive. The only sure-shot way to determine the business’s tax obligations is to work with a qualified CPA. They help you and outline what the tax services your business needs and guide you on how and when to pay.
Tip: it is your responsibility to set the money aside for all the taxes the business is obliged to pay- federal or state- all through the year.
Second Step: Just Use 30 Percent Rule To Save For Taxes
In order to cover federal taxes, saving 30 percent of the business income is the rule of thumb. It has been found that the total amount you must set aside to cover state and federal taxes must be around 30%-40% of what you actually earn.
Now, tax obligations differ from one business to another. If you would like to get granular or see if you can get away with saving less than 30%, you must talk to your CPA.
He would help find what percentage of the business income you save to cover taxes.
Third Step: Choosing The Proper Saving Method
You must set aside money for the small business taxes as often you can. The best savings method for your need would depend on what type of business you run as well as how long it has been operating.
The per payment method- this method makes real sense if you haven’t been in business for real long, or if this is the first year filing the tax return for the business.
The monthly method- this is the best to if this is this is the first year of your business that has turned profitable.
The yearly method- if you have filed tax return for the business last year and don’t expect the business to change a lot this year, you can opt for the yearly method.
The hired CPA can actually help you choose between these payment methods of tax services.
What Happens If You Underestimate The Tax Owed?
As per the rules set by the IRS, as long as you pay 100 percent in the present year of what you paid the earlier year in quarterly estimated tax, you wouldn’t be penalized for underpaying. Yes, even if the amount is too low you wouldn’t get penalized.