Nothing is certain except death and taxes – a statement made by Benjamin Franklin more than 200 years ago which still rings true today. Whether you’re an employee, business owner, or investor, you need to pay a certain percentage of your income to the IRS, and if you aren’t keeping on top of your tax calculations, you could find yourself in hot water when it comes to filing.
Paying too little tax could see you slammed for immediate payment of the rest, while paying too much could negatively affect your profitability, at least until you get a refund. For business investors, there’s no employer automatically withholding the right amount each month, you are in charge of calculating everything yourself. And payments are made quarterly, rather than yearly, so you can’t leave everything to the last minute.
So, in order to avoid getting in a tax muddle, here are some top tips to make the process less of a headache.
1. Use Your Allowances
Tax allowances are costs that you can claim are necessary to run the business, and you don’t have to pay tax on these. These include purchased materials, equipment, utilities, and maintenance of essential machines etc. So, if you purchase new computers for $1000, you can claim $1000 of your profits tax free. If you’re not keeping accurate records of your essential business purchases, you’re going to be paying too much tax.
2. Smart Forms
Using pre-printed smart forms can help you make sure all the right information is added when filing your taxes. Accurate reporting of income is key, both for business owners and their employees. The last thing anyone wants is to be fined for misreporting, especially if it was by mistake. By using smart forms linked to accounting software you minimise the chances for errors, giving both you and your employees confidence in your calculations.
3. Claim Reduced Tax
As an investor, how you receive interest on your investments changes how much tax you pay. If you receive dividends, these will have already been taxed, so you will pay a reduced rate on them, unless they are non-qualified dividends. If you can hold your assets in a tax-deferred account, you can reduce the tax you pay even further.
4. Make Losses Work for You
Investors and shareholders will often have a variety of stocks in their portfolios at once. Over the course of a year some will increase in value, while others will decrease. A process known as Tax-Loss Harvesting can help you use the stocks which have lost value towards a tax-free allowance on new purchases.
Here’s how it works: Once your shares have dropped below their original value, they represent a capital loss. If you sell them at this lower value, and then use the money returned to purchase additional shares in a different company, you can offset your taxable capital gains or income by the amount lost. Couples and individuals can have up to $3000 in harvested tax losses every tax year, so it’s a trick that’s well worth knowing and can save you hundreds of dollars.
Managing your taxes properly can help you reduce the inevitable bill. Look into different types of accounts and portfolios that mean you can defer or reduce taxes and accept dividends from US companies as you will get a special rate. Make good use of any stocks which depreciate to offset gain from others, and you will see your tax bill drop.
If you are running your own business, however large, consider investing in accounting software and/or purchasing pre-printed smart forms. These ensure that the information you give out to your employees is clear and concise, and helps you work out how much of their salaries to withhold in order to cover their taxes. Investing in or running a business makes you responsible for taxes, make sure you get it right.