Planning Your 2024 Business Taxes
Taxes can be tricky for business owners, but the first step is understanding your business entity and its tax implications. Whether you’re a Sole Proprietor, S Corporation, Partnership, or C Corporation, your tax filing depends on how your entity is classified. And if you’re thinking, “But I’m an LLC,” remember that an LLC can be taxed as any of these. If you’re unsure of your classification, consult your tax professional to clarify.
Sole Proprietors
Side hustles and small part-time businesses can become tax headaches if not managed properly. Common issues include neglected bookkeeping, unpaid quarterly taxes, and the added burden of self-employment tax at 15.3%. Combine this with your federal income tax rate (let’s estimate 12% for this example) and state tax (let’s use 6.8%), and before you know it, your side business income could face a tax rate of nearly 35% on every dollar you make.
To avoid surprises, consider these year-end strategies if you’re a Sole Proprietor:
- Catch up on your bookkeeping.
- Make sure you are capturing all expenses.
- Explore year-end asset purchase opportunities.
- Contribute to your retirement plan.
- Consult your CPA for a tax projection.
S Corporations
S Corporations are “flow-through” entities, meaning the corporation’s income is all taxed at the personal level, not the business level. Many former side hustles are advised to switch to an S when they have a business that has started to turn a profit because it helps reduce the self-employment taxes they have to pay. While S Corporation owners avoid self-employment taxes, they are required to pay themselves a “reasonable” salary. This strategy can provide significant tax savings, but consulting a CPA for guidance is essential.
Year-end tasks for S Corporation owners:
- Catch up on your bookkeeping.
- Consider year-end asset purchases.
- Distribute year-end employee bonuses.
- Contribute to your retirement plan.
- Pay pass-through entity taxes.
- Ensure your own salary is paid.
- Consult your CPA for a tax projection.
Partnerships
Partnerships are a common choice when starting a business with someone else and are the IRS’s default entity for multi-owner businesses. Similar to S Corporations, these are “flow-through” entities, meaning all the income from the Partnership is taxed on the individual level rather than the company level. However, unlike S Corporations, a Partnership does not pay partners a salary. Instead, they can take income as distributions or as guaranteed payments. General partners in this type of business, however, are subject to self-employment taxes. While there are advantages to operating as a Partnership compared to an S Corporation, it’s important to consider all factors when deciding if an entity change is a good idea.
Year-end tasks for Partnerships:
- Catch up on your bookkeeping.
- Consider year-end asset purchases.
- Distribute year-end employee bonuses.
- Contribute to your retirement plan.
- Pay pass-through entity taxes.
- Pay your quarterly taxes.
- Consult your CPA for a tax projection.
C Corporations
C Corporations are not “flow-through” entities and, therefore, are subject to double-taxation. C Corporation’s income is taxed at the entity level and any earnings distributed to owners are taxed again on their personal income. C Corporations are often more appealing to investors though, as they can have over 100 shareholders and place no restrictions on stock ownership. Again, If you are considering forming a C Corporation, it’s crucial to consult a CPA for guidance.
Year-end tasks for C Corporation owners:
- Catch up on your bookkeeping.
- Consider year-end asset purchases.
- Distribute year-end employee bonuses.
- Contribute to your retirement plan.
- Pay your quarterly taxes.
- Consider dividend possibilities and shifting income.
- Consult your CPA for a tax projection.
Planning Your 2024 Personal Taxes
As the holiday season approaches, it’s time to think about taxes. While it may not be the most festive topic, knowing how much you owe in taxes or if you can expect a refund can help you plan for the busy season. Here are some key steps to prepare:
1. Identify All Income Sources
This is the biggest factor in determining taxpayers’ upcoming tax liability (tax owed). If a tax professional only knows part of a taxpayer’s income, they cannot give an accurate projection of taxes. The best starting point to identify all income sources is your prior year tax workpapers or 2023 tax returns. From there, think about any changes like a new job, starting a business, retiring, beginning RMDs, or Social Security distributions.
2. Understand Deductions
Deductions reduce taxable income. Common deductions for W2 employees include HSAs, IRAs, and student loan interest. Individuals can either take the standard deduction or an itemized deduction, but with the standard deduction rising each year, more taxpayers are taking it. Business owners may have additional deductions from self-employed health insurance, self-employed retirement plans, and qualified business income.
3. Explore Credits
Credits are items that lower tax liability for the year, including child tax credits, childcare expenses, college education payments, energy-efficient home improvements, clean or electric vehicle credits, foreign tax payments, etc. These credits gradually “phase out” as the taxpayer’s income rises.
4. Track Tax Withholdings and Quarterly Payments
Tax withholdings are payments the taxpayers make throughout the year that come out of paychecks, IRA distributions, pension distributions, social security payments, or 1099 income. Quarterly tax payments are payments the taxpayer can make based on income level for the year. Be sure to gather things like paystubs and IRS payment confirmations to help keep records of withholdings, quarterly payments, and other tax-related payments.
5. State taxes
State tax rules differ from federal ones, and can also change each year. A tax professional can help navigate these differences and ensure an accurate projection.
Getting organized now can make tax season feel a lot less stressful and more manageable. Taking the time to understand your income, look into deductions and credits, and keep track of your payments can really pay off when it’s time to file. The sooner you start, the easier it’ll be to avoid surprises and feel ready for whatever comes your way this tax season.
Mack Short and their tax related services offered through North Point Accounting & Tax Services, LLC (DBA North Point Advisor Group). Mack Short and North Point Accounting & Tax Services, LLC, a separate legal entity, are not affiliated with LPL Financial. Any opinions or views expressed by Mack Short are his own and are not those of LPL Financial.
