Are you one of those online business owners who face the tax filing season with dread? Do you scratch through drawers searching for receipts days before your income tax return is due?
You are not alone. Many online business owners find themselves in a similar predicament at the end of the tax year.
The good news is that you can resolve this issue with a few simple interventions from our tax filing tips. You can also reduce your income liability by claiming for all deductible expenses.
Diarize Tax Deadlines
When it comes to tax filing tips, a biggy is to make sure to diarize the tax deadlines and start preparing ahead of time. You don’t want to run the risk of paying penalties for the late submission of tax returns.
If you really can’t make the tax submission due date, apply for an extension. Filing for an extension has no effect on the due date for tax payment, but it will give you more time to file your tax return.
The extension is automatic if you file it before the deadline. The IRS will inform you if, for some reason, they reject your extension request.
Get Help
Before you even consider filing your tax return, you have to record your earnings and expenses. The best way to ensure that you keep a regular account of your income and expenditure is to invest in accounting software. Still, if accounting is not your forte, you may need more than just the software.
An online bookkeeping business like Bench will present you with a reconciled income statement every month. The service is run by financial experts who can help you with advice on income tax rates, tax returns, and more.
Bear in mind, you will need a legitimate paper trail if the IRS decides to audit you. This means keeping all receipts in a good filing system. Scan and file your invoices electronically so that they are easy to retrieve when you need them.
Get expert advice on allowable expenses. This way, you can ensure that your online business makes the most of the available benefits to reduce your taxable income.
Tips for Calculating Expenses
Startup Expenses
Did you know you can claim some of your startup expenses even before you earn an income? You can claim capital expenses of up to $5,000 in your first year of business. Costs, such as advertising or marketing incurred as you investigate and set up your online business, are claimable.
You may also claim amounts over the $5,000 threshold, but you may have to amortize them.
Home Office Deduction
If you make regular and exclusive use of a home office space, you can claim a home office deduction. Allowable expenses include mortgage interest, rent, property taxes, and utilities.
The IRS requirements for the office deduction are strict. So, don’t try to claim for a family entertainment space where you check your mail from time to time.
A valid claim for home office deductions must comply with the following requirements.
- Exclusivity – the office must be used exclusively for your online business
- Regularity – you must use your office regularly
- Precedence – you should carry out your most important business in your office and spend most of your working time in the office.
The Small Business Administration reports that 50% of businesses are based at home, yet the IRS says that many business owners don’t claim.
When claiming an office deduction, you can choose from two claiming methods, the simplified and the standard methods. The simplified method allows you to claim $5 per square foot of your home that you use as an office. The amount is capped at $1,500. If you choose the standard method, you claim costs for the percentage of your home that you use for business activities.
Internet and Telephone Costs
If you have an office phone that you use only for your business, you can claim the costs as a business expense. If you use a cell phone or internet connection for business and personal use, you must work out the percentage you use for the business and claim that. Itemized billing will come in handy if the IRS audits your tax.
Vehicle Usage
You may have to use your vehicle for business. If you plan to claim the expenses on your tax returns, and why wouldn’t you, you will have to keep a logbook. At the very least, keep a list of meetings and appointments on your calendar so that you can calculate your business mileage for the claim.
Choose from the standard mileage rate or the actual expense method to calculate the vehicle expense.
Deductions for Equipment
Office furniture and equipment are, of course, tax-deductible. In some instances, you may deduct it as a business expense. Otherwise, it may be a Section 179 deduction, or you may choose to depreciate it over time. An accountant can advise you on the tax benefits of each of the options.
Advertising and Promotional Costs
You may deduct all advertising and promotional expenses from your online business income. This will include your website installation and maintenance, along with hosting, SEO, and any other related expenses.
Shipping and Postal Service
The costs of shipping your products to your customers are all tax-deductible. You can claim your distribution costs regardless of whether you use the postal service or a haulage company. If you’re covering the costs of returns, don’t forget to claim for these expenses too.
Increase Your Retirement Funding
Reduce your business income by helping your employees to save for retirement. You are also entitled to make tax-deductible contributions toward your own retirement funding. You will have to set up a SEP IRA. Depending on your income, in 2020, you could pay up to $57,000 into the plan. This amount is subject to change.
Educational Costs
Your online business can claim educational expenses if they are necessary for the improvement of skills. If you or your employees attend seminars or courses, you can deduct the expenses from your taxable income. Transport costs to and from the venue are also deductible. Professional licensing and trade magazines are likewise legitimate business expenses.
Make Life Simple with Accounting Software
One thing that you need to realize here, especially in terms of those many and complex cost calculations that we talked about above, is that you really don’t have to do any of this yourself.
Sure, you can go old a school and do all of the heavy lifting yourself, but seeing as there are many programs and pieces of software out there that can do this for you, there is really no point in wasting your time and energy.
One of the best things that you can do to help prepare yourself for tax season, is to use a good piece of accounting software, with one of the most popular, easiest to use, and cost-effective ones being Freshbooks.
When it comes to Freshbooks and your taxes, you really just have to perform a bit of data entry, or in other words, plug the right numbers into the corresponding fields, and Freshbooks will take care of most of the heavy lifting for you.
FAQ
Do You Have to File Taxes If You Have an Online Business?
Every business must file a tax return, even if they don’t make a profit. State and federal taxes are due on all income earned in the US, even an online business enterprise.
Is Selling Online Considered Self-Employed?
This depends on what you sell and how much you sell online. If you sell a few personal items that you no longer need, you are not running an online business and are not considered self-employed. If you sell online regularly intending to make a profit, you are self-employed and will have to pay for social security and Medicaid.
How to Pay Taxes for My Online Business?
Every online business must file a tax return when the tax season comes. State and federal taxes must be paid on all income earned. In addition, online business owners must pay self-employment costs to cover social security and Medicaid. How your tax is paid will depend on your business structure. Most small businesses are sole proprietorships, so the income from the business is taxed in the hands of the owner.
As an online business owner, you must estimate your income and pay the estimated amounts quarterly.
Recommendations
Bench
Bench is an accounting platform helps you prepare your taxes, and it offers year-round tax advisory support. This software also collects all the necessary documents for tax season before it files all your taxes for you. Everything gets done on time, which means that you don’t have to worry about tax liabilities. Even your fees for using Bench can be tax-deductible!
The Last Word
Get prepared for the next tax season. Use the above tax filing tips. An online bookkeeping service will ensure that you receive monthly income statements. They will also serve you well, ensuring that you are ready to make your quarterly tax payments. They will ensure that you receive any tax credit due.
Know your rights when calculating your taxable income, and make sure that you claim all allowable expenses. Why pay more tax than you have to?
