FAQs
We answer common questions impacting both your tax and financial situations. We welcome you to contact us anytime for your specific concerns.
WHAT IS THE DIFFERENCE BETWEEN A TAX DEDUCTION AND A TAX CREDIT?
Tax deductions help to reduce your taxable income. Say you earn $50,000 per year, this puts you in the 22% tax bracket. A $12,000 standard tax deduction would reduce your taxable income to $38,000. As a result, you’d only be taxed on that amount. The effect is the same whether you use itemized deductions or not. Your taxable income would go down. A tax credit, on the other hand, reduces the amount of money you owe in taxes. So, if you receive a $1,000 tax credit, you will pay the IRS $1,000 less.
WHAT ARE BUSINESS TAXES?
The IRS categorizes business taxes into five categories, as shown below. However, not all business owners will be required to pay every type of business tax! The type of business you run will determine the typr of taxes you pay.
- Income Tax
You file an income tax return on behalf of your business because you own it. In this case, the “income” of the business is the profit earned throughout the year. You pay taxes on your profit as a business owner. The level of tax liability and how income tax is calculated are determined by the type of business you run (sole proprietorship, single member LLC, partnership, S Corporation, or C Corporation). - Estimated Tax
Employees have money deducted from each paycheck for tax purposes. However, if you own a business, you pay regular income taxes throughout the year. You will file an estimated tax form at quarterly intervals to accomplish this. - Payroll Tax
If you have employees, you are required to pay certain payroll taxes. These include Social Security and Medicare taxes as well as unemployment tax. - Excise Tax
If you gamble professionally or sell products such as gasoline, cigarettes, or alcohol, you may be required to pay excise taxes.
Furthermore, some states may levy sales tax, property tax, litter tax, tire tax, gross receipts tax, franchise tax, or dividend tax on business owners. Again, the taxes you owe will be determined by the type of business you own and the state in which your business license is issued.
HOW SHOULD I SEPARATE MY BUSINESS FINANCES FROM MY PERSONAL FINANCES?
It’s critical to keep your business and personal finances separate. Consider keeping separate business and personal checking accounts and accounting systems. You are required to keep meticulous records of all business-related transactions. These include payment receipts, invoices, bank/credit card statements, etc. These will come in handy in case the IRS error comes knocking. Consider keeping such records for at least 10 years.
WHAT RECORDS SHOULD I KEEP FOR MY BUSINESS?
You must keep meticulous records of all business transactions.
WHAT RECEIPTS DO I NEED TO BRING FOR MY PERSONAL TAXES?
You should keep a variety of receipts for tax purposes. You should keep receipts for medical and childcare expenses, for example.
WHY SHOULD I DEFER INCOME TO A LATER YEAR?
During their working years, most people are in a higher tax bracket than during retirement. Deferring income until retirement may result in lower taxation of that income. Deferral can also be beneficial in the short term if you expect to be in a lower tax bracket the following year or if you can benefit from lower long-term capital gains rates by holding an asset for a longer period of time.
WHAT TAX-DEFERRED INVESTMENTS ARE POSSIBLE IF I'M SELF-EMPLOYED?
Consider establishing and contributing as much as you can to a retirement plan. These are permitted even for a sideline or second job. There are several types of plans available, including individual or self-employment 401(k) plans, SEP (Simplified Employee Pension) plans, and SIMPLE IRA plans.
