The end of 2020 cannot come quickly enough for the majority of startups and small businesses. The arrival of 2021 brings the new tax season, which could be a difficult one following the programs introduced to combat the financial problems caused by COVID-19.
The 2018 Tax Cuts and Jobs Act has brought several changes for startups to cope with, according to Business News Daily. Tax season will be different from previous years, with sales tax filing issues just one of the problems facing startup entrepreneurs.
1. Be Certain of your Business Structure.
When you establish your business, you should start by creating the structure you hope your startup will work within. The structure you choose for your startup will have taxation implications, which you will need to address before filing your taxes. The choices you have depend on the number of members you have in your team of owners. If you are the only owner of your startup, a sole proprietorship is the best option for taxation purposes. When you have partners in your startup, you should explore the options open to you in forming an official partnership or act as an LLC.
2. Check your Deductions.
There are several deductions you can explore when you are looking to complete your sales tax filing. Dave Ramsay explains several deductions are available for you if you are the sole proprietor of a startup during the 2021 tax season. Among the deductions you can explore during the 2021 tax season include travel expenses and claiming for a home office, if you work from your house. The growing number of people who have moved to home office working has grown during the COVID-19 pandemic, meaning this deduction will be claimed by more taxpayers this season. It is important to remember, home office deductions are available to those who work year-round in this way. Being sent home from your office to work remotely is not a reason to file this deduction.
3. Remember COVID-19 Payments.
One area of the sales tax filing season that will be unique to 2021 is the need to account for COVID-19 payments and associated programs. The CARES Act introduced the Payroll Protection Program, which is a forgivable loan for small businesses. The CARES Act is not classed as taxable income when it is used correctly by a startup. As the owner of the startup, you will need to keep track of the amount of any PPP loan that is forgiven and removes this amount from your taxable income.
4. Label Your Employees Correctly.
How do you classify your employees? The question that has tripped up many startups when it comes to tax filing season. The first step is to research which options are open to you as an entrepreneur. If you are the sole owner and employee of your company, you should file your taxes as the sole proprietor. If you employ others, you can classify them as employees or as independent contractors. The difference between an independent contractor and an employee is the use of a minimum wage, worker’s compensation entitlement, and other benefits offered to employees. If you do not correctly classify your employees, the IRS will be willing to investigate your tax filing.
5. Stimulus Checks.
The impact of the COVID-19 pandemic and its associated financial problems was the provision of stimulus checks from the U.S. Government to people in some tax brackets. If you have received a stimulus check during 2020, you do not need to class this as taxable income. The stimulus check you received is not taxable, meaning you do not have to declare the amount you received on your taxes.
6. Unemployment Payments and Taxes.
Some experts have stated the financial impact of the COVID-19 pandemic will be as difficult to cope with as the Great Depression. Unemployment has been a part of the life of millions of Americans throughout 2020, leading to the use of unemployment benefits. Any money received as part of a filing for unemployment must be declared as taxable income, whether you were managing your startup or employed by another company. The IRS will check to make sure the payments you received for unemployment benefits are declared.
7. Make sure your Paperwork is up to date.
The most important tip you can receive as an entrepreneur is to make sure your paperwork is in order before filing your taxes. You should ensure receipts are filed and copied for all the deductions you are claiming, just in case the IRS decides to question your filing in 2021. The organization of your paperwork is one of the keys to being a successful entrepreneur is to keep your paperwork filed and ready for viewing at all times. Several software tools can be used to keep your papers in order and available for viewing at any time.
Being prepared can lessen headaches as you enter into tax season. Having all of your documents, expenses, and this list, will make tax filing easy.
The post 7 Finance Tips Every Startup Should Be Aware Of For The 2021 Tax Season appeared first on Young Upstarts.