Over the past four years running a small business, I’ve learned several things the hard way. For example, I’ve learned that paying self-employment tax as both an employer and employee is a real bummer. And I’ve also learned that taxes are a lot more complicated for the self-employed than they are for employees.
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Each year about this time I promise myself that I’ll do better next year when it comes to taxes. I’ll keep better records. I’ll keep my personal expenses separate from my business expenses. I’ll keep better track of miles put on our car for business purposes. And the list goes on. So to help you avoid the mistakes I’ve made in the past, here are five smart tax moves to consider for your small business:
1. Get a business credit card: For the first year of my business, I put business expenses on a personal credit card. This was a big mistake for three reasons. First, it’s much easier to keep your company’s expenses separate if you use a business card. Second, if you do pay interest from time to time, it’s very difficult to separate the interest expense between personal and business purchases. And finally, some of the better business credit cards offer some excellent rewards, including cash back or travel rebates. You’re going to spend money on your company, so you might as well get some perks from your card.
2. Hire a tax accountant: While you can prepare your own taxes, of course, for most companies hiring a tax accountant is the smarter move. A tax accountant likely will find deductions you might miss, and they will reduce the chances of making a costly mistake on your returns. If you do decide to go it alone, however, make sure to purchase reliable tax software such as TurboTax for business.
3. Open a retirement account: One of the advantages of being self-employed is that you can put more money away for retirement in tax-advantaged accounts. Whether you open a SEP IRA or solo 401(k) will depend on a number of issues, and is another reason why hiring a tax accountant is a smart move. There are a number of low cost online brokers that offer retirement accounts, and opening an account online takes just a few minutes. And remember that you can still contribute money to a retirement account for 2010, generally until the April 15 filing deadline (but again, check with the tax accountant you’re going to hire!).
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4. Use tax breaks to grow your business: As my business grew, I began hiring contractors to help grow the business. I also invested in equipment, mostly computers, and began attending relevant conferences. Each of these expenses is deductible, meaning that my actual cost is about two-thirds of the purchase price. You don’t want to use tax breaks to buy goods or services your business doesn’t need, but the tax incentives can help you expand your business in a cost effective way.
5. Keep meticulous records: This is the part I struggle with the most. Fortunately, my wife is far more organized than I am. So she put together a filing system for all receipts, contracts, bank statements, and other important business records. We also use QuickBooks to keep track of income and expenses. QuickBooks has a bit of a learning curve (at least it did for me), but once you get the hang of it, you’ll wonder how you lived without it.