7 tax season tips for cleaning businesses
Let's explore some tips that cleaning business owners should keep in mind to make tax season go more smoothly this year and the next.
1. Get your paperwork in order
If you have employees or independent contractors, you should have sent their W-2 or 1099 forms by January 31. If you're just starting out your cleaning business and flying solo, now is a good time to get your records together, including your business income and your expenses.
To save yourself a last-minute scramble in April, be sure to have these documents organized and save your receipts. Most accountants these days prefer digital files (e.g., an Excel spreadsheet or scanned receipts) when it is feasible. You should hold on to these records for at least seven years, in case of an audit from the IRS.
2. Brush up on tax code changes
There are several changes to the tax code to be aware of this year:
- There are seven tax brackets for the 2021 tax year, based on income.
- The standard deduction for the 2021 tax year is $12,550 for single filers, and $25,100 for married couples filing jointly. For head of households, the standard deduction is $18,800. This is the amount you can subtract from your income before tax is applied.
- Congress increased the amount of tax-deductible medical expenses in 2021 to be 7.5 percent of your adjusted gross income.
The CARES Act and the Consolidated Appropriations Act, passed in 2020, offered a number of temporary tax changes to help businesses during the pandemic. Key provisions that expire include:
- The business interest expense deduction limit was temporarily set at a company’s total interest income, plus 50 percent of adjusted taxable income (ATI). For the 2021 tax year, the limit returns to the previous level of 30 percent of ATI.
- Employee Retention Credits, which gave employers tax credits for keeping employees on their payroll, were eliminated for wages paid after Sept. 30, 2021.
3. Pay your quarterly taxes and plan for next year
If you earned more than $400 in net income in 2021, you have to pay self-employment taxes (i.e., Social Security and Medicare taxes). Depending on how much revenue you made last year, you probably have to pay income taxes, too. (Read more about that on FreelanceTaxation.com.)
Being self-employed means you have to pay your income taxes in equal installments four times a year to both the state and federal government. If you owe more than $1,000 in taxes when you file your annual return, you can be penalized.
Don't worry if you didn't know that this year and haven’t paid your quarterly taxes. Plan ahead and set up regular meetings with an accountant this year so it doesn't happen again.
4. Work with an accountant for best results
If you do owe outstanding taxes for 2021, an accountant can help you budget to pay back taxes and penalties you may owe. Your accountant can also help you figure out how much to pay in quarterly taxes.
Be sure to keep good records of your business income and expenses so that your tax preparer has all the information they need to give you sound advice. Scheduling meetings throughout the year can help ensure your cleaning company doesn't get any financial surprises later on.
5. Be careful when making business deductions
Contrary to popular belief, not everything you spend on your business is tax-deductible. The IRS has plenty of rules for you to follow, so be sure to work with a professional to help you figure out which expenses are eligible for a tax write-off.
If you run a cleaning service out of your home, you may be able to take a home office deduction. The IRS even streamlined this deduction: simply take the square footage of the home office and multiply it by $5 to calculate the amount you can write off.
Your necessary expenses, such as cleaning supplies (mops, brooms, etc.), are tax-deductible. For all of your cleaning products, it’s a good idea to keep your receipts and have accurate records in case of an audit. Many small business owners put their expenses on a company credit card to make it easier to monitor for their income tax return.
If you make extravagant deductions (e.g., deducting travel and entertainment expenses that aren't business-related), it can be a red flag to the IRS and trigger an audit. Again, working with an accountant can help ensure you take all the tax deductions you're entitled to without going overboard.
6. Is health insurance deductible?
Health insurance is one among the number of insurance policies that are typically tax deductible for your small business. Health insurance expenses for your employees and their dependents are 100 percent tax-deductible as ordinary business expenses on both state and federal income taxes.
You might qualify for the Small Business Health Care Tax Credit, worth up to 50 percent of the cost of healthcare premiums for your employees.
If you’re self-employed, you can deduct your own health insurance premiums so long as you turned a profit during the tax year, and you were ineligible for coverage through another means (such as through another employer, or through your spouse’s coverage).
7. How to handle business vehicle deductions
If you have a company car that’s only used for business purposes, the IRS says you can deduct the cost of maintaining and owning the car—but only for business-related expenses.
For a personal car that’s also used for business, you can only deduct the expenses related to its cost of business use. Be sure to check the IRS rules on business vehicle deductions to make sure you comply.
There are two ways of handling your business vehicle deductions: the standard mileage rate or your actual expenses. The standard mileage rate changes each year and is based on the number of miles you drive for business purposes in a year. The rate for the 2021 tax year is 56 cents per mile driven for business use.
If you base your vehicle deduction on actual expenses, you must determine your cost of operating the vehicle and deduct only the portion of the costs that apply to the number of miles you drive for your business. Your car expenses can include gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation or lease payments.
An accountant can help you determine which way makes the most sense for your business and allows for the biggest deduction.
Tolls and parking fees aren’t tax-deductible in terms of your vehicle expenses, though you might be able to include them as part of your general business expenses when figuring your deductions.
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