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Saving for Taxes as a Young Entrepreneur

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In 2016, BNP Paribas commissioned a study to find out how Millennials stack up to other generations when it comes to entrepreneurship. The results are astonishing.

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In 2016, BNP Paribas commissioned a study to find out how Millennials stack up to other generations when it comes to entrepreneurship. The results are astonishing. Millennials under thirty-five have already started twice the number businesses compared to Baby Boomers and they don’t show signs of stopping. But before anyone starts a business, there are a lot of things to consider — it’s time to talk about finances and taxes.When forming my business two years ago, I was fortunate to start making money within the first quarter. While I basked in the glory of business ownership and feeling like I was making more money than ever before, I continually had to remind myself that I didn’t get to keep all of that money. Unlike when you’re an employee and certain taxes are automatically withheld each pay period, as an entrepreneur it was up to me to deduct these from my gross income so I’d have the money needed to pay my taxes the following April. And if you decide to operate as a Sole Proprietor like me, you need to save more than you think since employers are also responsible for covering a portion of your Social Security and Medicare taxes that you’ll now need to pay in full. When thinking about paying taxes as an entrepreneur, here are a few things to keep in mind.

Legal Structures

Before making their first dollar, entrepreneurs need to decide how to structure their businesses, as this will affect liability, taxation and whether or not employees can be hired. Since I work in a low-liability industry and have no desire to hire employees at the moment, I chose to operate as a sole proprietor, but limited liability companies (LLCs), S corporations and limited liability partnerships (LLPs) are also popular options. Entrepreneur.com provides a comprehensive overview of different types of legal business structures to help you make an informed decision for you and your business.

Income Tax Brackets

Each year, the IRS releases a table of tax brackets indicating the percentage an individual or couple is taxed based on annual income. This is a helpful bit of information to keep in mind throughout the year, especially if you think you might be on the verge of moving into a different tax bracket and paying significantly more than the year before. Young entrepreneurs should use these tables to help them estimate how much money to put aside for taxes throughout the year.

Quarterly Tax Payments

Not all entrepreneurs are mandated to pay taxes quarterly, but the IRS typically requires this of business owners who will be paying in more than $1,000. While it may seem like an extra step to mail four separate checks throughout the year, quarterly tax payments can help entrepreneurs avoid the sticker shock of a large year-end bill and ensure they won’t come up short financially by being required to pay the whole tax bill at once.

Know Your Deductibles

Unlike employees who aren’t able to deduct expenses related to their jobs from their annual income, entrepreneurs can help significantly lessen their tax burden by staying on top of expenses and categorizing them according to personal and business costs. Common write-offs for entrepreneurs include office space (even within their homes), utilities, travel, client entertainment, supplies, transportation, education, healthcare, retirement contributions and any legal costs. Looking for more tips? Check out this list of 75 Items You May Be Able to Deduct from Your Taxes.

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