April 15 is coming in just a few short months, and if your small business hasn’t been preparing all year long, you are going to need to put in a lot of extra work to be ready for tax time.
Many college students don’t realize that starting a small business makes them responsible for a long list of taxes; in addition to the taxes they pay on the income they earn, they often also need to pay business tax, city tax, sales tax, payroll tax, and other taxes depending on the type of business and the number of people involved.
Students also need to understand that nearly every money-making venture they undertake in college can qualify as a small business. Do you, for example, earn money tutoring high school students or proofreading your friends’ senior thesis? That counts as freelance income and, if the money you earn is over a specific threshold, requires you to pay self-employment income tax. Do you have a band that plays at a local bar and sells CDs and T-shirts? You’re responsible for self-employment income tax on your percentage of the band’s earnings, as well as sales tax on everything you sell.
And, if you create a hugely successful business, such as Hamilton College student Jeremy Young’s laundry service, HillFresh Laundry, you had better be prepared to pay your taxes — all of them. These types of laundry and cleaning services often provide major profits to the enterprising students willing to wash, fold, and deliver their peers’ laundry, but if these entrepreneurs don’t take the time to learn about the taxes involved in running a small business, they’ll quickly find out that they’re the ones hung out to dry.
The IRS has a wealth of information and forms available for small business owners, as well as enterprising freelancers and self-employed students. However, sometimes it takes a tax expert to help you understand and navigate the forms, as well as help you uncover tax responsibilities you may have missed. New freelancers, for example, often don’t realize that they actually need to pay taxes four times a year instead of once; quarterly estimated taxes are the government’s way of reducing the freelance tax burden by evenly distributing it throughout the year.
If you are already familiar with paying small business or freelance taxes, that doesn’t mean that you don’t have any extra work ahead of you for April; your job is now to figure out which tax requirements have changed since last year. As the team at ADP employment tax services notes, there were 17,000 tax rule changes proposed in 2012. Paying your 2013 taxes will no doubt be a slightly different experience than paying your 2012 taxes, so consult a professional to learn about new tax rule changes and how they affect you.
If you are suddenly nervous that your small business or freelance job failed to pay its city tax, sales tax, estimated tax, or any other kind of tax, don’t worry. The quickest way to figure out if you’ve accidentally neglected a tax responsibility is to talk to a tax adviser. If you neglected to pay a tax, simply fill out the appropriate form and pay it. You may have to pay a small penalty if your taxes are late, but you’ll get it taken care of and can go back to working on growing your business.
The one thing you don’t want to do? Skip your taxes completely. This choice will catch up with you eventually, and the penalties are likely to be much more severe. Besides, learning how to pay taxes is all part of becoming a successful entrepreneur and managing a small business. When you pay taxes, you should congratulate yourself on doing something that very few people manage to do: earn money from a business you created yourself.
Now get to work, because April 15 is coming soon.