Now that tax season is here, you might feel excited or scared. Many Americans look forward to tax season because it's when they get their income tax back. With special deals on new cars, home improvements, and big-ticket items, stores all over the place offer ways to make the most of your tax refund. A lot of the talk about taxes during tax season is about people getting refunds. However, most small business owners dread tax season because they have to pay the IRS at this time of year.
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| No Tax Refunds: Three Tax Time Advice for Company Owners Who Owe the IRS |
If you owe the IRS money this tax season, you should know three important things.
Most business owners still need refunds
When you get a tax refund, it's your own money that you're getting back. It means you paid too much to the IRS for the year, giving them a loan with no interest. People who get a W-2 wage often overpay and are due a refund. Statistics from the IRS show that in 2022, 66% of individuals who filed taxes were due a tax refund. But as a business owner, you don't get all your W-2 wages, so you're likely only to pay a little in taxes. This is a good thing for you in general. You would only overpay this bill for your business and then wait until the next year for the vendor to give you the money back. In the same way, you shouldn't pay too much to the IRS.
This year, consider making estimated tax payments
When you file your taxes, if you owe more than $1,000 to the IRS, they may charge you interest and penalties for not paying enough. The IRS is a pay-as-you-go tax agency, so you can't wait to pay your taxes each year until you file your return. If you owe taxes for 2022, you may have to figure out how much you owe and send in estimated tax payments every three months in 2023. You can use the IRS's free Estimated Tax Payment Calculator to figure out how much you need to pay in taxes each quarter this year. With your 2021 tax return and an estimate of your 2022 income, you can determine if you need to pay estimated taxes and how much you need to pay every three months. You won't have to pay penalties or interest if you don't pay it on time.
You are the one who decides how much tax you have to pay
At this time of year, you are probably thinking about the requirements for tax preparation for the year 2022. If you want to do your taxes for 2023 successfully, you need to keep the same level of enthusiasm. Tax planning is a preventative measure that enables you to exercise command over the amount of money owed to the government in the form of taxes around this time the following year.
For decades, large corporations have been able to exercise control over the amount of tax they must pay. The IRS receives no tax payments from many of the most successful businesses in the nation. Large corporations such as Amazon, FedEx, and Nike have used loopholes in the tax system to avoid paying taxes and legally increase their owners' wealth. Regarding your small company, you can exert that same level of control by using tax reduction measures. For the best results, you should work with a certified public accountant (CPA) or a tax strategist to develop and carry out a personalized tax strategy. To lower your tax liability for this year, however, you have several choices that you can make on your own and independently put into action.
You may get started by determining which tax category you fall under. You have the ability to choose the method of taxation that will be applied to your company. The number of your profits will determine the most practical choice for your tax situation.
You can file as a disregarded entity if you are a single taxpayer and the owner of a start-up business that is yet to be profitable. This is the kind of business organization that is selected by a lone entrepreneur most of the time. Your revenue and costs related to your company will be reported to the IRS on Schedule C, which is part of your personal income tax return. There is no need for a special election to proceed with this first tax categorization.
If your annual earnings exceed $13,850, you can switch to tax filing as an S corporation as your company expands. You must submit Form 2553 to the Internal Revenue Service to choose this tax status. For those who pay their taxes based on the calendar year, the election must be submitted by March 15. When your company achieves this level of profitability, converting to an S corporation will allow you to avoid paying the 15.3% self-employment tax on your income, resulting in considerable tax savings. Consult with your tax expert to see how your company might benefit most from using this tax position.
When your company reaches a point where its annual earnings are more than $170,050, you can change your tax filing status to that of a C corporation using IRS Form 1120. To opt into this tax status, you must complete IRS Form 8832. For those who pay their taxes using the calendar year, the election deadline is also March 15. Because of its categorization, your company is subject to the higher tax rate applicable to corporations, which is 21%. On the other hand, a single S-corporation owner would be subject to taxation at 32% on this amount of earnings. Because of this status, your income will not be subject to the 11% individual tax rate, resulting in tax savings of almost $18,000.
You may determine your company's most appropriate tax classification using these profit rules for this current tax year.
No Refund, No Trouble
You are now armed with the information necessary to shut out all of the conversations about tax refunds that will be taking place this year and to upgrade your emphasis from tax preparation to tax planning for your company.
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