Setting up your small business as a Schedule C business is one of the easiest ways for you to start your business. As your business grows, keeping up with your tax obligations can get complicated quickly. Here are some key tax tips for your Schedule C business that will help you strengthen your operations while keeping you in compliance.
What types of businesses use Schedule C for filing?
Every day, entrepreneurs like you open their businesses in a huge range of industries as Schedule C filers. That’s because a Schedule C lets you easily turn your side hustles and hobbies into small businesses quickly and for a very low cost. With a Schedule C, starting your business is as simple as filing a form or two with your local and state offices, such as a county clerk and your state’s tax department.
When you get started, here are two important factors to keep in mind:
- Staying in compliance with local, state, and federal tax requirements means that you’re meeting your legal and financial obligations. This is important as it demonstrates to lenders, investors, and others that your business is in good financial standing.
- When your business is compliant and your financial management is sound, you and your accountant can improve your business’s performance through tax strategies. These strategies might reduce your business’s tax liability while keeping your small business in compliance.
As a Schedule C filer, there are a few nuances you should know that will keep your business prepared throughout the year.
Key Schedule C business tax tips
When was the last time you reviewed your operating structure? And how are you planning to pay your taxes throughout the year? Here are a few tips that can help your Schedule C business get ready for tax season and more.
1. Ask a certified public accountant (CPA) and an attorney to review your business’s operating structure
If you’re just starting out, filing as a Schedule C business is probably the right move. However, if you’ve been in business for several years as a Schedule C, and have been growing steadily, then it may be time to change your business to another operating structure.
Other business structures, such as a C Corp or S Corp, may allow you to have a lower tax liability and make it easier to bring on partners. Plus, there are legal limitations on how long you can file as a Schedule C based on your business’s revenue, so be sure to review this with your CPA and attorney.
2. Be sure to pay your estimated taxes regularly, including your personal income tax and your federal self-employment tax
Personal income tax is the tax you pay on income that you received from your business as well as any other reported taxable income. This can include income from investments or from a job that you’re working while you get your small business off the ground. Self-employment tax is the amount you have to pay for items like Social Security and Medicare deductions that would normally be paid by an employer through withholdings from a paycheck.
As a Schedule C business, you should set aside money for income-tax payments and self-employment taxes. Many business owners don’t set aside funds for self-employment taxes, and then have to find room in their budget to cover what they owe.
One of the easiest ways to ensure that you’re prepared is to have an automatic transfer set up to move 25-30% of your gross income into a separate account. You can keep funds there until you make your quarterly estimated tax payments. You’ll want to work with your accountant to figure out a strategy that will work best for your situation to avoid this painful mistake.
3. Track your financials throughout the year
To easily generate accurate profit-and-loss (P&L) statements for your business you’ll want to use financial-management software such as QuickBooks, FreshBooks, Xero, or Wave. This will make it much easier to do your taxes accurately, whether you’re preparing your own filings or using the help of an accountant or a tax preparer.
Your Schedule C can also serve as your business’s year-end financial statement. You can use your interim financial statements to plan throughout the year and to show lenders a snapshot of your business’s financials if you need to secure financing.
4. If you have multiple businesses, it’s important to file separate Schedule Cs for each business.
Doing this will make it easier for you to differentiate each business’s revenues and expenses, which can help you make better decisions about each business. For example, you’ll be able to see where you should invest additional resources and what expenses you need to reduce. This is also very important if you’re planning to apply for funding or sell your businesses in the future.
5. Know the red flags that might cause an IRS audit or increased scrutiny by third parties, such as lenders, investors or potential buyers.
Things that might be considered red flags can include significant income growth or consistent losses along with using a lot of 1099 contractors instead of employees. These are just a few types of tax-related issues that could increase your chance of an audit. Be sure to seek appropriate guidance as your business grows. Review any plans that could result in significant changes year-over-year with a CPA, and make sure to review your labor practices with an attorney.
Pursuit has more small business tax tips and business resources to support you
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