When you operate an LLC or Sole Proprietorship, you will be responsible for making a quarterly estimated tax payment for federal income tax as well as following the tax laws for your state. While there is some leniency for underpayment, the IRS has standards that provide for penalties if you significantly underpay your taxes. It can also be a shock to your finances if you find that you owe than you thought you would.
All of your business expenses, travel for conferences, 50% of meals and entertainment, memberships, cell phone, 50 cents per mile is deducted from your gross income.
You need a simple filing system for keeping track of your paper receipts. It will be much simpler to keep track of business expenses if they are on separate transaction receipts rather than being mixed with non-deductible purchases. It is also preferable to purchase business items on a separate business credit card. The credit card statement becomes a good cross-check to see that all your receipts get entered into your accounting system so that you get the items deducted.
Quickbooks is the industry giant used by many but it can be a huge learning curve for non-accountant solo practitioners. It is also costly when you add up the monthly fees. Wave Accounting offers FREE online business tracking with a much more intuitive interface. Wave has a smartphone app that allows you to import an image of each receipt into the program to produce income, profit, and expense reports. Wave allows you to process credit cards for a fee and will generate invoices. Freshbooks and >>>> other programs may also be good alternatives for your business.
Annual Tax Returns
If you use an accountant, you will need to give them your organized receipts with very clear notations so that they are not guessing what was purchased. Handing them a shoebox of paper will be costly for them to organize and will increase the chances that valuable deductions will be missed.
Turbotax Home and Business is designed to handle the Schedule C – Profit and Loss From A Business preparation you will need. It is set up in a step-by-step question and answer format that feels comfortable and provides you a great deal of important education on what is and is not deductible so that you will have greater insight as you consider the tax benefit of future purchase decisions. The program will calculate your self-employment tax (15.5% of your business profit) to be filed on the Schedule SE.
If you have been scanning your receipts into the Wave app and categorizing each business expense through the year, you will be able to easily produce expense reports according to tax deduction category. The step-by-step Turbotax questions are easy to answer when you can run the Wave Accounting report for each category.