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5 Common Small-Business Misconceptions about Taxes

24. February 2015 08:06

woman doing her taxes

Tax season is here, and with it comes anxieties, confusion, terror, and misconceptions. Maybe even a little fire and brimstone. Hyperbole aside, taxes are notoriously complicated, and many small-business owners who brave their taxes on their own may rely on pieces of tax wisdom heard from friends or read online. That is to say, if you're not an accountant or a certified tax professional, chances are you may not have the background needed to separate fact from fiction.

So let's get some things straight.

Tax Myth #1: I don't have to pay quarterly taxes.

If you're a W-2 employee whose taxes are being withheld by your employer, no, you don't have to pay quarterly taxes. And if you're a W-2 who freelances on the side, you may not have to pay them if you withhold enough federal and state taxes from your regular paychecks to cover the extra you may owe.

But if you don't fall under either of those categories, you most certainly are required to pay quarterly income and self-employment taxes to both the state and federal government. Failure to do so results in underpayment penalties when you file your annual return. Your accountant can advise you on how much to set aside, but usually, 30 percent is a safe starting point.

Quarterly taxes are due by…

To learn more tips on freelance taxes, check out the post "Did You Freelance This Year? Now Is the Time to Focus on Small Business Taxes."

Tax Myth #2: Affordable Care Act penalties aren't that expensive.

That depends on how you look at it. It's true that your penalty for not having health insurance by tax time this year is probably less than what you'd pay for a whole year of coverage. But here's the thing: you're going to pay the penalty and still not have insurance. That means if you have an unexpected injury or illness, you'd have to pay all your medical bills out of pocket and you'd still be out the money you paid in fines.

Doesn't seem like a good gamble, does it? You essentially get a double-whammy hit when your health takes a turn for the worst.

By now you know that you're required to buy your own health insurance if you don't have coverage through an employer or a spouse. Failure to obtain that coverage means you will pay Obamacare penalties, and those fines will increase each year. For 2015, your penalty will be the greater of the following two amounts:

For example, if you're a freelancer who lives alone and makes $40,000, you'd owe $800 (i.e., 2 percent of your income) for not having insurance. When you file your 2015 taxes, your penalty will be deducted from your return or added on to the amount you owe.

Tax Myth #3: I can deduct whatever I spend on my business.

You can deduct quite a few business expenses, but don't get carried away. It's important to work with a tax professional to ensure you take every deduction you're entitled to but don't take too many and set yourself up for an audit.

Here are some common small business deductions:

For more pointers on deductible business expenses, check out this guide by Nolo.com.

Tax Myth #4: I can just put everything in a shoebox and my accountant will know what to do.

Now that's just mean. Don't make your accountant's job harder than it already is. Help them make sense on the heap of expenses you've amassed over the year by…

Remember, the more you organize your expenses and income, the less time you'll have to spend away from your work explaining what it all means to your accountant. Plus, the little forethought helps your accountant file your taxes quicker.

Tax Myth #5: CPAs and tax pros only fill out forms that I can do myself.

Unless you're a financial wizard and study tax laws for fun, chances are licensed preparers know way more than you do about taxes and how to save your business the most money. Licensed preparers must receive IRS-approved training each year to ensure they are current on the latest tax code changes. Also, enrolled agents can represent you to the IRS if you're audited. To find a tax expert in your area, you can search the National Association of Enrolled Agent's directory.

Tags:

Contractors | Freelancers | General | Small Business | Tips for All Small Businesses

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