The end of the financial year (EOFY) is an important time for your business. It’s a time to reflect on your successes and failures over the last 12 months and to set goals for the coming year. It’s also a time to review your expenses and ensure you’re up-to-date with your tax obligations.
If you’re a business owner, chances are you’re already feeling the EOFY crunch. But while you’re busy getting your affairs in order, it’s important to take a step back and ensure you’re not overpaying on your taxes.
Sure, the IRS will never complain if you overpay your taxes. But why give them more money than you have to?
Why let them hold onto money that could be channeled into other business-critical areas? It’s like giving Uncle Sam a small loan that you’ll only get back months down the line.
To help you out, we’ve put together a list of five signs that you might be overpaying taxes. If any of these sounds familiar, it might be time to review your tax situation and make sure you’re getting the deductions and credits you’re entitled to.
5 Overpaying Signs
1. You didn’t factor tax into your entity structure
Choosing a legal business structure is a critical decision for any business owner. But it’s not just about which entity provides the best liability protection. Your business structure also has implications for your taxes.
There are different types of business entities – sole proprietorships, partnerships, LLCs, S-Corporations, and C-Corporations. The type of entity you choose will have different tax implications.
If you choose the wrong entity, you could end up overpaying your taxes. Proprietorships or partnerships, for example, are subject to self-employment tax, which includes Social Security and Medicare taxes.
Key Stat: Improper structuring potentially adds up to 15.3% of your income in additional taxes because you are paying both the employer and the employee.
If you’re incorporated as an S-Corporation or C-Corporation, on the other hand, you can avoid this self-employment tax. Instead, you’ll only pay taxes on the salary you take from the business. This can save you a significant amount of money in taxes every year.
2. You get money back for your business
Businesses typically pay quarterly tax payments but get money back if they’ve paid too much. Getting a lot back means you’re overpaying throughout the year, which could lead to a cash flow crunch.
You can avoid this by doing a little tax planning. Estimate your taxes for the year, and make sure you’re setting aside enough money to cover them. This will help you avoid any surprises come tax time and ensure you have the money you need to keep your business running smoothly.
Strategic tax planning also ensures you’re taking advantage of all the deductions and credits you’re entitled to. This can help reduce your tax bill and leave you with more money to reinvest in your business.
3. You didn’t take enough cash out of the business
If you operate an LLC, partnership, or sole proprietorship, you can take out money from your business tax-free. This is called a draw or distribution. The owner’s draw is not subject to payroll taxes, so it can save you a significant amount of money.
However, if you don’t take enough money out of the business, you could end up overpaying taxes. That’s because you’ll be paying taxes on the money you reinvest in the business rather than taking it out as a distribution.
There is a caveat, though. Owner’s draw requires more personal tax planning, including self-employment taxes and estimated taxes. So, it’s important to speak with a tax advisor before making any decisions.
While S corp and C corp owners typically do not take draws, they can still reduce their tax burden by paying themselves a reasonable salary. This salary is subject to payroll taxes, but it’s still lower than the income tax you would pay on business profits.
4. Your business needs things (it doesn’t have)
As a business owner, you may be tempted to be frugal and not spend money on things you think you can live without. But if there are business-critical items that you’re not buying because you think they’re too expensive, you could be overpaying in taxes.
Why? Because there are certain business expenses that you can deduct from your taxes. This includes things like office supplies, marketing expenses, travel, and business meals.
Not spending money on tax-deductible essentials is a good way to harm your business while paying too big of a tax bill.
5. Your tax preparer didn’t share any strategies
Some tax prep firms do your taxes but don’t offer a comprehensive plan for saving money on your return. If you haven’t heard the word “strategy,” chances are your current solution isn’t prepared to do more than file properly.
A good tax preparer will discuss your overall financial picture and offer advice on how to lower your taxes. This may include strategies like incorporating your business, paying yourself a salary, or taking advantage of tax credits and deductions.
Don’t be afraid to ask your tax preparer about ways to save money on your taxes. If they can’t offer any helpful advice, it may be time to find a new tax professional.
Working with a strategic tax preparer can help you save money on your taxes and improve your financial situation.
Work with a Firm with Proven Savings
Running a successful business requires more than grit. It demands foresight. Tax planning is one way to ensure your business is on the right track for long-term success. Yet, many business owners don’t plan for taxes and end up overpaying.
If you’re like most business owners, you want to maximize profits and keep as much of your hard-earned money as possible. You work hard for your money, so it only makes sense to keep as much of it as you can, right?
The good news is, there are steps you can take to reduce your taxes. But it’s not always easy to know where to start or what to do. That’s where we come in.
Phillips Business Group is a full-service tax firm that specializes in helping businesses save money on their taxes. We have a team of experienced tax professionals who can help you take advantage of opportunities to reduce your tax burden using proven tax strategies.
We’ll work with you to understand your unique situation and create a customized tax plan to save you money. Contact us today to learn to know how our service can help you find, save and keep more of your hard-earned profits.