As a small business owner or entrepreneur, you’re new to the business world; therefore, you probably have a lot of questions about how to file your taxes, what documents you need, and much more. So, we sat down with our CEO and CPA Ford Baker to ask him a few of your most popular tax questions. From a tax expert, here is some helpful information that should help you plan for your business from a tax and accounting perspective.
Q1: How should I structure my business?
Your business is important. It helps you provide a livelihood for your family. It gives you a sense of purpose and hopefully, satisfaction.
Having said that, you want to structure your business in a way that protects the people around you and your legacy as well as maximize any potential savings. That’s where we come into play. From a tax perspective, the answer to this question is always, “It depends.” There isn’t a one-size-fits-all answer. From a legal perspective, you’ll want to consult with an attorney to determine what the best legal structure for your business is.
If I were to sum it up, you want to select a tax structure that maximizes your legal liability while also minimizing your taxes. Feel free to reach out to us if you have any questions.
Q2: What’s the difference between employees and contractors?
Employees are those who you employ, as simple as that sounds. From a legal standpoint, the answer can be very convoluted. There are different requirements for what differentiates an employee from a contractor. Here are some of the key differences.
- Employees, you can control that. You can have them sign agreements where they can’t accept outside work. The people you employ are part of your team, they are the bread and butter for any company.
- Contractors simply add value. They can take any work from you that you want to get done. You have agreements with them, and you issue a 1099 at the end of the year as opposed to a W-2.
- If you’re an employee, your employer pays their share of the payroll taxes, and you, the employee, are responsible for your portion of the social security and Medicare taxes.
- From a contractor's perspective, the contractor is not responsible for any portion of these taxes because they’re not an employee. The employer pays them a lump sum amount and the contractor is responsible for their own taxes.
Q3: What are my financing options?
If you’re a small business that’s looking to infuse money into your business, there are two ways you can do that.
The first way is debt. Debt is money that you will owe somebody in the future. Most of the time, debt comes from banks. Sometimes this starts out with an SBA loan which is a Small Business Administration loan that exists to be able to spur economic activity for businesses that are starting up. Another option for financing includes external loans from third parties. This can be from your friends, family, or private equity investors who are willing to spend money on earning interest from you as your business grows and as you pay them back.
The second way to infuse money into your business is equity. This is when partners come into your business to help bring in money and raise capital. You want to make sure that all agreements are in place before entering into this type of relationship where someone else puts in money but also takes equity away from you.
It’s always important to make sure legal agreements are in place no matter what form of financing you’re using. This prevents future issues with financing or other partners you might have in the future. You should consult a legal advisor about these matters as well.
Q4: What are my tax obligations?
If you are an employee of a company, your obligations include withholding taxes throughout the year through your W-2 paycheck. You’ll see the exemptions you have when you fill out a W-4 when you first get onboarded to a company. In order to calculate how much withholding there is for federal and state purposes from your payment, check each period.
If you own entities such as an S-Corp or a C-Corp, then you’re required to pay quarterly tax estimates because the IRS is on a pay-as-you-go system. The tax form that an S-Corp or partnership owner will receive after year-end will show the income that your business made. In order to avoid any estimated underpayment tax penalties, you will have to pay quarterly. There are four quarterly payments. The first is on April 15th, the second is on June 15th, the third is on September 15th, and the fourth is on January 15th of the following year.
Q5: What is a good way to structure or manage cash flow?
The best way to structure and manage cash flow is to always have a steady flow of cash coming in. This could be every week, every two weeks, or every month. As a business owner, you can fret about not having as much money in the bank or having value sit in accounts receivable waiting to be transformed into cash. If the vendors just paid it, you wouldn’t have that issue, but that’s not what CPA firms have done in the past which is part of the problem. CPAs believe their work needs to be billed by the hour and we need to receive value after the work is completed, but if we keep doing the same thing repeatedly for our clients and get paid the same amount every year, why not just split up their annual fee into monthly payments? Clients can sign an authorization to debit their credit card each month. That’s exactly what we’ve done, and it’s allowed us to have a steady flow of cash and be able to pay our employees a steady paycheck. Switching to what’s notoriously named as a subscription pricing model allows you to manage cash flow in a steady stream rather than sporadic payments throughout the year. You can accelerate payments and transform value.
Those without subscription pricing models will want to defer expenses when possible to structure and manage cash flow. This means if you get a bill that’s due in 30 days, you wait 30 days to pay it. But with accounting technology, we can automate those payments for future dates, so when you receive the bill, you can take action now by setting up an automated payment for 30 days down the road. This strategy allows you to hold on to the cash as long as you can and provides you options to plan out cash flow rather than react to it.
Published on Mar 07 @ 9:58 AM CDT