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Saving Taxes for Your Business

Saving Taxes for Your Business. This is the Story of Tim ‘The Tool Man’ Taylor. After 20 years working for the ABC Construction Co, Tim decides to open his own home remodeling business. So Tim Does All the ‘Normal’ Things:. Gets his professional license Joins a trade group

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Saving Taxes for Your Business

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  1. Saving Taxes for Your Business

  2. This is the Story ofTim ‘The Tool Man’ Taylor After 20 years working for the ABC Construction Co, Tim decides to open his own home remodeling business

  3. So Tim Does All the ‘Normal’ Things: • Gets his professional license • Joins a trade group • Opens a bank account • Contacts everyone he knows (advertises) • Hires a helper named Al (but forgets about payroll taxes) • Remodels some homes • Collects from his customers • Pays his bills • Doesn’t hurt anybody or anything (Whew!)

  4. So Far, So Good! Tim’s business made about $80,000 in profit (he thinks), but he has a sneaky suspicion that he’s forgetting something. ? ? ? ? ? ?

  5. And then Tim remembers what he had previously forgotten: INCOME TAXES! Oh no!

  6. So Tim goes to see his CPA, and takes with him: • Bank statements • Receipts for job supplies, tools and vehicle fuel • A list of payments made to his ‘independent contractor/helper’ • Invoices to his customers • His rehearsed speech why he didn’t keep better records • His wife and a box of Kleenex

  7. Tim’s Tax Situation • Married (Jill) • 3 Precocious Kids (Brad, Randy and Mark) • Homeowner

  8. Tim’s CPA, a sharp fellow named Paul, explains how self-employed people calculate and pay their taxes

  9. Paul explains the different forms of businesses to Tim: • Sole Proprietorships • Corporations – Regular or ‘C’ • Corporations – Subchapter S • Partnerships • Limited Liability Companies – LLCs • Others

  10. Where Does Tim Fit In? Because Tim didn’t form a formal business through the Secretary of State in the state he lives in, he is a Sole Proprietor.

  11. Paul calculates Tim’s Income Taxes Profit from the business $ 80,000 Less: Home mortgage interest $(13,000) Less: Property taxes $( 5,000) Less: Church and charity giving $( 5,000) Less: Personal exemptions $(17,000) Equals taxable income $ 40,000 Income Tax = $ 5,300 Less: Child credits $ (3,000) Final income tax bill $ 2,300

  12. Only $2,300! Whew! Tim breathes a sigh of relief!

  13. Paul: ‘Not so fast Tim, we are only ½ the way through calculating your taxes.Tim: ‘Huh? ½ the way??’Paul: ‘Yes Tim, we have to calculate your Social Security (Self-Employment) taxes now’Tim: ‘You mean I still have to pay Social Security taxes like when I worked for ABC Construction Co?’Paul: ‘Yes, and it’s going to hurt twice as much!’

  14. Paul explains that Sole-Proprietors like Tim still pay Social Security Profit from the business $80,000 Less: Home mortgage interest $ 0 Less: Property taxes $ 0 Less: Church and charity giving $ 0 Less: Personal exemptions $ 0 Taxable income for Social Security $80,000 Social Security Tax @ 15% $12,000

  15. Tim’s Total Tax Bill

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