Navigating the complex web of taxation may be a daunting experience for seasoned entrepreneurs and newcomers to business ownership. One of the most common questions is the distinction between filing business taxes and personal taxes. While combining private and corporate funds may appear advantageous for small business owners, knowing the importance of maintaining a clear distinction between these tax entities is critical.
This article explores the subtleties of filing business taxes separately from personal taxes, illuminating the distinctions, detailing the benefits, and providing practical insights to help a better understanding.
Do You File Business Taxes Separate From Personal Taxes?
The answer is determined by various factors, the most important of which is the sort of business.
1. Ownership By A Single Person
If you own an unincorporated business by yourself, your business is classified as a sole proprietorship. In this case, your business taxes should be reported along with your taxes.
2. Collaboration
If your company is owned or operated by more than one individual, the business type changes slightly. Your taxes will most likely be filed as a partnership, which means you will report your portion of the taxes on your tax return.
3. Organization
Because corporations are generally regarded as autonomous tax-paying entities, their taxes will not be lodged with your tax.
If your company is a corporation, you must submit your business revenue separately from your earnings.
4. LLC (Limited Liability Company)
How an LLC’s taxes are filed is determined by the number of owners and the corporation’s status. If an LLC has only one owner, it is considered a single proprietorship and must file personal taxes.
LLCs with two or more proprietors are frequently deemed partnerships and must file personal taxes.
If an LLC chooses to be handled as a corporation (which is possible regardless of the number of owners), the taxes must be filed separately as business taxes.
How Can I Keep My Business And Personal Taxes Separate?
You must establish your company to separate your personal and commercial spending properly. It starts with deciding on the ideal business structure for your needs and then registering it. Once formally established, you may create a business bank account, obtain a corporate spending card, and organize your funds. Here are some easy steps to success.
1. Select And Register A Business Structure
First, you must determine your business structure. You may also need to register it depending on what you choose. In the United States, you can select between sole proprietorships, corporations, and limited liability companies (LLCs). The structure you choose is determined by liability, taxation, and record-keeping.
2. Obtain A Federal Employer Identification Number (EIN)
An EIN is similar to a social security number. However, it is just for corporations. The IRS issues a unique nine-digit number to maintain track of a business’s tax reporting. They are also known as “federal tax identification numbers.” An EIN, like your social security number, always stays active. Except for sole proprietorships, most businesses require an EIN.
3. Establish A Company Banking Account
This is one of the most crucial measures in keeping your business and personal accounts separate, and you should prioritize it.
A specialized business bank account allows you to manage everything in one spot, from paying bills to purchasing office supplies. The alternative is that your company transactions are mixed with your account, which is inconvenient and can lead to liability difficulties in some situations.
4. Get A Card Specifically For Business Expenses
You should have a specific corporate card for your business purchases, like a separate banking account. Using personal credit cards for corporate expenditures will result in many bookkeeping issues. So stay away from that!
You can issue numerous physical and virtual cards (up to 50!) and use them for specific spending categories if you utilize a banking platform like Relay. Instead of having just one card, you can build dedicated cards for:
- Marketing costs
- Expenses for travel
- Employees in particular
5. Keep Track Of Your Expenses And Receipts
Every purchase you make for your company must be documented. Excellent tools are available, such as QuickBooks Online and Xero, to assist small businesses in managing everything from bills to payroll.
Even if you don’t have a lot of actual receipts, you should save them and keep track of what you spend. If you are ever audited, you will be required to provide documentation.
Tips For Meeting Deadlines
1. Make Use Of Digital Calendars
Users can establish recurring events and reminders in digital calendars like Google or Apple. Set this for all tax dates that apply to your company and activate notifications.
2. Consult A CPA Or Tax Professional
They will advise you on tax planning and preparation and ensure you are informed of and fulfill all deadlines, significantly if they alter.
3. Maintain Orderly Records
Proper record-keeping throughout the year will make the filing process more accessible. This also means you won’t be scrambling for paperwork as a deadline approaches.
4. Maintain Your Knowledge
Tax laws and deadlines are subject to change. You can stay current by joining professional business associations or subscribing to tax-related newsletters.
While sole proprietors and partnerships are not required to file separate business taxes, corporations, and certain LLCs are. When selecting whether to file individual or joint taxes, it is critical to balance tax benefits, liabilities, compliance duties, and the correct keeping of financial records. Seeking professional counsel and being current on tax regulations can help business owners make educated decisions and effectively handle tax difficulties.
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