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Last Updated on January 20, 2024 by Work In My Pajamas
Tax requirements shift every year for small and home-based businesses — not to mention the entire process is frustrating and leaves you squinting at the IRS website days before the deadline. For these reasons and more, many small entities end up in inadvertent noncompliance.
Don’t risk getting audited by the IRS. Here are five tax issues that every small and home-based business should look out for.
In This Post:
1. Estimated Quarterly Tax Issues
Many owners of home-based businesses underpay personal income taxes — they may believe that estimated quarterly tax payments are optional. Unfortunately, these are mandatory and must be paid on time and all together — in four installments on April 15, June 16, September 15 and January 15. If you have income from your business and expect more than $1,000 in tax liability, make estimated quarterly tax payments. Otherwise, interest and penalties are due on the unpaid total.
Pay them because nonpayment will hurt your budget due to inflation of taxes at the end of the year and slow growth of the business, taking a major portion out of your checking account. Interest accumulation on those unpaid taxes is no joke. The rates are high, and penalties go up when you don’t file.
The auditors don’t mind estimating your quarterly taxes when you fail to file. If you’re horrible at record keeping, you’ll have difficulty challenging any tax liability the IRS places on you. Keep accurate files, and file on time.
2. Not Getting the Right Advice in Advance
Tax litigation and business tax advice from attorneys aren’t only for big shot corporations. Doing the research now and getting the right advice in advance will help you effectively grow your business. In a shifting economic climate, it’s important to weigh personal and business considerations and identify any tax issues — since you work at home, what percentage to deduct and how gets confusing. Anything from debt restructuring to low-income housing credit could apply to your taxes.
3. Don’t Mix Business and Personal Expenses
Always keep your business and personal expenses separate. Partition out business expenses from the deductions, such as internet connection, website hosting, cell phone bills and computer software. If you use your internet for both business and personal reasons, you would only claim the specific percentage spent online for work duties.
The easiest way to keep track is to have a separate bank account for business expenses that you only use for making business-related purchases. Keep your business debit card separate from your personal one to sidestep any mix-ups.
4. Claim Your Home Office Deduction
Home-based businesses can claim a home office deduction, which includes a percentage of mortgage and rent plus particular utilities. Do you use a spare bedroom for the home office? If this room is used only for business, count the total square footage toward deducting part of your rent or mortgage.
Only deduct the portion you use for business if the home office has multiple purposes. Say you use a portion of a room under 300 square feet. You’ll use what’s called the simplified method to calculate your deduction by multiplying each square foot by $5. You’ll need to define this area as a workspace for it to apply — consider using a partition to signal the divide.
5. Tax Reporting Required No Matter Where You Go
The beauty of working remotely or owning a home-based business is that home is anywhere you go in the world, which means you shouldn’t have to pay income tax — right? Unfortunately, tax reporting and paying back home to the United States is required no matter where you escape to mix business with pleasure.
If you contract with a Canadian company, you still need to pay taxes to the United States. If you live in Mexico a few months out of the year, you still pay taxes for the time you worked as a United States business owner back to the tax man. Stay on track with your taxes back home when you’re finding your inner peace while taking a conference call in Bali.
Avoid Confusion
Confusing tax issues arise when you own a home-based business, such as claiming a home office deduction when you only use a portion of a space.
You should always keep up with your taxes, no matter where you are, and making quarterly payments aren’t so bad. Think of the shifting seasons of the year, and the rest will come naturally.
