Professional Development

Tax season is here. New small biz owners, heed these fundamental filing tips

If you're behind one of the 5.1 million new businesses formed in 2022, you might have some questions ahead of April 18.

Tax time. (Photo by Pexels user RODNAE Productions, used via a Creative Commons license)
Are you ready for April 18, 2023?

If you’re behind one of the 5.1 million new businesses formed in 2022 — a near-record, behind only 2021 — you might have some questions ahead of Tax Day.

The CASH Campaign of Maryland, located in Baltimore, offers tax expertise to underserved people in the state. The nonprofit specifically works for the economic advancement of low- to moderate-income Marylanders, especially at tax time. Rob Bader, its director of tax operations, sat down with Technical.ly to provide five good-sense recommendations for new business owners filing with Uncle Sam and their state this year.

(Note: If you’re launching a tech startup or have employees, your needs may be more advanced than what the advice below offers.)

Tip #1: Keep a shoebox file at minimum.

“It sounds elementary, but we have a lot of people who start a business, and they may be good at their craft or skill, but they do not keep their records,” Bader said. “When they come to us to get their taxes done, you almost have to create a return. The IRS is OK with it for a year or two, but you have to keep some kind of receipts you (tax) preparers can work with.”

The tax expert said any money you bring in, you should have some way of tracking. And for expenses, you should at least have a receipt.

“At a bare minimum put everything in a shoe box,” he said. “That gives the preparer something to start with. That’s not ideal, but it’s a lot better than nothing.”

Tip #2: Create an independent business bank account.

“I do know people from startups who mixed their personal account with business, and it becomes very hard to track what expense and what income is personal and what is business,” Bader said.

If an accountant or tax preparer is looking at your bank accounts, they need to be able to tell which income and expenses belong to your business, and what ones are personal. Business accounts usually require a minimum deposit, or can even be free, so the biggest investment is taking the time to do it.

Tip #3: Structure matters.

Bader said most of the people Cash Campaign of Maryland works with don’t need to start a corporation. If your innovation or business fits well into a simple business structure — sole proprietorship, partnership or LLC — don’t be afraid to keep it that way. Keeping it straightforward can save both time and money at tax time.

“The moment you start a corporation, you are responsible for that corporation,” Bader explained. “You have obligations to the IRS. You have board meetings and a lot of other things. As soon as you do that, your tax obligations to the IRS will be a lot more complicated than just filing a tax return on your own.”

(P.S. Don’t forget: Your founding date is BS, but might involve your incorporation date, if you have one.)

Bader does think it is wise for new founders starting out to go to an accountant or a tax good preparer the first time — someone who can explain the ins and outs of what’s being asked of them.

Tip #4: Remember the quarterly self-employment tax.

“That is 15.3% of your adjusted gross income — your net income for the business,” Bader said. “You have to pay income tax on the profit for the business, but you also have to pay self-employment tax.” The self employment tax covers your Social Security and Medicare tax obligation.

“A lot of people aren’t ready for that,” Bader said,  He advises making sure you pay estimated taxes throughout the year. It’s required quarterly, but you can even do them monthly, which might be easier. “They want their tax throughout the year,” he said. “It’s hard to do, because you have to estimate how much you think you will make by the end of the year, which is hard to do if you’re a new business.”

If you don’t pay quarterly you could be penalized by the IRS and the state when you file in April.

Tip #5: Expect to be surprised.

“A lot of people come to their preparer and that’s when they figure out if they’re making a profit,” Bader said. “Don’t be alarmed if you’re losing money.”

He advised trying to avoid installment agreements to pay taxes due, because there is interest that accumulates. He noted, too, if you get a refund, you can tell the IRS you don’t want it this year so the agency can pay it toward the next year’s taxes. It can be a hedge against a rainy day in 2024, but you might be better off reinvesting that money in your business now, and boosting your business in 2023.

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