Tax Tips for Entrepreneurs with New Small Businesses
As she celebrates one year in business, Patricia Wynn gets expert advice on how to tackle taxes
Editor’s note: In this series, Next Avenue will follow Patricia Wynn as she embarks on becoming an entrepreneur with her North Carolina lifestyle assistant business. Future installments will note her progress, with advice for her and for other midlife entrepreneurs.
For new small business owners like Patricia Wynn, April signifies not only spring but also filing taxes for their startup for the first time. This month marks one year since the establishment of her lifestyle assistant business Patricia Services, LLC in Hillsborough, North Carolina and Wynn says while it is "challenging to have everything gathered for all of the business expenses," she is prepared.
The 53-year-old entrepreneur said having a separate business bank account "to show all of my monthly costs like the Vistaprint for my signage, webpage and domain, as well as how much I've spent for my Care.com account, uniforms, administrative fees, cleaning supplies and office supplies," has been very helpful.
"I think next year I'm going to do the quarterly estimate (tax payments) for the business, so I'll know what I owe ahead of time."
In addition, Wynn said she has been careful about keeping track of her receipts, mileage and home office costs, as well as her earnings from each client, by recording the information in an administrative book of printed documents and using the Everlance app on her phone to compute mileage for work-related driving.
She noted, "I've been doing my own personal taxes for several years either using Turbo Tax or Credit Karma. With the business, I will use Schedule C, but also have one of my clients, Susan Crisp, who is an accountant, look over the electronic tax forms before I hit send," said Wynn.
She added that if Crisp finds errors, she will pay her to make corrections before she files.
Obtaining an Employer Identification Number (EIN)
Following the advice of her SCORE mentor, Maxine Stern, Wynn has obtained an Employer Identification Number (EIN) which she can use on tax forms for the business.
"Moving forward," said Wynn, "I think next year I'm going to do the quarterly estimate (tax payments) for the business, so I'll know what I owe ahead of time."
Stern, a former CPA at Duke University in Chapel Hill, North Carolina, said new entrepreneurs can go to the IRS.gov website to get an EIN for no additional cost.
"The IRS links the EIN with your Social Security number, so they know it is you. The reason having an EIN for business is important is that, for security reasons, you don't want to be giving everyone your personal Social Security number," said Stern.
She added that when it is time for a new entrepreneur to file taxes, "everyone doesn't need an LLC (limited liability company) but they do need to think of themselves as a sole proprietor."
For their business, noted Stern, entrepreneurs can use Schedule C in their personal income tax for filing, whether they file as a single person or jointly with a spouse.
She said that with Schedule C, "You list all of your revenues, meaning any cash or checks (from the business). You must list the 1099 forms separately, and then there will be an area where you are asked about all of your expenses."
In terms of federal, state and local taxes, it is very important that small businesses show their legitimate expenses so their tax is based on their actual profit.
According to Stern, "Most small businesses file (taxes) once a year. Once they have a lot of tax liability, they have to send in estimated taxes four times a year. I think one of the most important things that a new business can do is hire a bookkeeper. It's less expensive than a CPA. The bookkeeper can help the new business owner be organized and coordinate with a CPA if one is hired at tax time."
The Benefits of a Community-Based Bank
Entrepreneurs might also get more personal attention if they set up company accounts for their small businesses at community-based banks, according to David Deeds, Schulze Professor of Entrepreneurship at the University of St. Thomas Opus College of Business in Minneapolis and editor-in-chief of the (EIX) Entrepreneur and Innovation Exchange, which is a funder of Next Avenue.
Small business owners, said Deeds, "should use a small community-based bank rather than a large national bank. A smaller bank will help you understand when quarterly payments must be made and may have referrals for a bookkeeper."
Keeping track of all deductibles is also key for a new startup or LLC, noted Deeds. "Make sure you keep track of your mileage and use federal mileage deductions. Keep track of parking expenses, too. This is why you need a business account with a separate credit or debit card." The IRS business mileage rate for 2021 was 56 cents per mile.
For small startups or LLCs, there are a variety of opportunities to lower taxes through deductions. The IRS allows these businesses to deduct $5,000 in startup and organizational costs if their total startup costs are $50,000 or less. These costs can include research and development investigating whether the business idea is viable, training employees, and ordering supplies.
According to the IRS, if a small company's startup or organizational costs exceed $50,000, then the amount of the allowable deduction will be reduced by the overage.
Other deductible areas include, but are not limited to, business property rent; auto expenses connected to business use; rent and depreciation on equipment and machinery; advertising and marketing; business insurance; travel expenses including local tolls; office supplies and furniture; the home office; computer software for the business; hiring legal or accountant professionals; and retirement plan contributions.
When it comes to filing taxes, Stern says there are some common mistakes that entrepreneurs with new businesses may make. For example, it is important to realize that each startup has expenses that are unique to their particular type of business.
"The federal government says if you are buying something that you wouldn't otherwise use for anything outside of the business, then it is a legitimate business expense," she noted.
Relying on Her Strong Organizational Skills
Stern mentioned that there are two ways to calculate the home office deduction. Both are based on the percentage of the square footage of your home used for business. One is a percentage of your actual home office expenses; the other is a simplified formula using a specific dollar amount per square foot.
"Now I'm taking something that I learned earlier and using it for something of my own."
Wynn credits her previous career as a general manager at two franchise restaurants with giving her strong organizational skills.
"I learned about keeping track of profit and loss from years of working at McDonald's and Wendy's. We made projections and looked at maintenance, repair and labor. Now I'm taking something that I learned earlier and using it for something of my own," she said.
Both Deeds and Stern stressed the importance of entrepreneurs being organized when it comes to separating personal and business expenses. According to Stern, using a financial tracking program over the short and long term might assist new business owners in taking an honest view of their startup.
"People don't always see everything in an objective, analytical way," she said, and tracking their business expenses, revenues and profits might help them do that better.
Deeds said having a separate account to record business expenses not only helps Wynn figure her taxes better but also "makes her set to grow."
He added that as a lifestyle assistant providing cooking, cleaning and sometimes caregiving to clients, "she is in a growing market — helping people to age in place, which is more and more necessary as boomers age."