Tax planning is an important part of any business. It’s a way to reduce your overall tax liability, and it can be done at different stages in the life cycle of a company. Although tax planning is more common for larger companies with hundreds or thousands of employees, it’s not uncommon for startup businesses to start with their tax strategy.
In this article, we talk more about tax planning and what startup employees need to know about the process. We also discuss some ways that you can save money by using tax strategies that are specific to startups.
What Is Tax Planning?
Tax planning is the process of taking steps to minimize taxes owed. The main goal of tax planning is to reduce your total taxable income so that you pay less in taxes than you would if you had no plan. To do this, you must first determine how much tax you owe, then look for ways to reduce your taxable income. Tax planning should be part of your financial plan as an employee or company so that you can take advantage of all available deductions and credits when filing your taxes.
For startups, there are two primary types of tax planning: individual tax planning and corporate tax planning. Individual tax planning refers to reducing your personal taxes on your own earnings, while corporate tax planning refers to reducing the taxes owed by a corporation. As mentioned above, it’s important to have a tax plan strategy while you’re still small because as your company grows, you’ll want to make sure that you don’t end up paying too much in taxes.
Tax Planning for Startup Employees
Startup employees can benefit from tax planning because it helps keep them out of trouble with the IRS. If you’re working for a startup, here are three things you need to know about tax planning:
1. Startups Have Different Types Of Taxes
As a startup, you might already know that you will have payroll taxes, but did you know that you could also have other kinds of taxes? There are several different kinds of taxes that you may face, including Social Security taxes, Medicare taxes, state taxes, and local taxes. These taxes vary depending on where you live, so it’s best to check with your accountant or bookkeeper to see which ones apply to your situation.
2. Startups Can Save Money By Using Deductible Expenses
When starting a new business, it can be difficult to figure out whether certain expenses are deductible. Deductible expenses include those that are related to running a business, such as rent, utilities, insurance, and advertising. For example, advertising costs can be deducted from your taxable income, so long as you spend enough money on advertising to qualify. However, there are other expenses that aren’t deductible, like travel and entertainment.
3. Startups Can Use Tax Credits to Reduce Their Taxes
If you work hard and run a successful business, you may qualify for tax breaks. One tax credit that many people use is called the “Estate Tax Credit.” This is a special credit that allows individuals who pass away before they reach retirement age to avoid estate taxes. In order to receive this credit, you must meet certain requirements, such as having earned at least a certain amount of money during your lifetime.
4. Startups Should Consider Hiring An Accountant
Startups don’t typically hire accountants right off the bat because they don’t want to spend too much money. However, it’s important to consider hiring an accountant when you’re just getting started. A good accountant can help you save time and money by reviewing your books and helping you prepare your taxes correctly. Down the road, an accountant can also help you navigate the transition from the taxes of a startup employer to a big company.
Tips for a Good Tax Planning Strategy
Here are some basic tips that can help on how you can plan your tax as an employee and create a good tax planning strategy.
1. Start early.
Although it’s tempting to wait until you have more experience before making any changes to your taxes, doing so can lead to problems down the road. Also, think about what sort of taxes you’re going to owe in the future. When you know how much you’re going to pay in taxes each year, then you can determine how much you should invest in your business.
2. Keep track of your spending.
It’s easy to forget about your finances when you’re busy working on your business. You might not realize how much you’re spending unless you start keeping track of your expenditures. Make sure to write everything down and categorize your expenses into different categories, such as rent, marketing, and more.
3. Pay attention to deductions.
You should always look for ways to write off certain expenses so you can claim your tax deductions. Some examples include taking out loans, buying equipment, paying for business-related travel, and investing in your company. If you find yourself unable to take advantage of these types of deductions, talk to your accountant or financial advisor. They can provide suggestions regarding how you can improve your finances.