How to Understand Tax Returns as a New Entrepreneur?
It is not surprising that in today’s busy world, Entrepreneurs often get so involved in their daily business operations that they forget the basics of processing their tax returns.
A lot of times, they might not even be sure of the steps that they need to take or how much they are even supposed to turn over to the government in tax.
There is often so much to do and too many moving parts in their businesses. They are left scrambling for a way to put their books in order by the time the tax is due.
Notwithstanding, there will be no excuses when the tax-collector comes knocking, and it is essential to be prompt, precise, and clear with the process of filing your tax returns.
Considering how important taxes are, the credibility of your business seriously hinges on how efficient you are with your taxes, and it will help you track, in detail, how much money is and should be leaving the business to the government.
The benefits of understanding tax returns surpass any underlying doubts you might have as a new entrepreneur.
Before we deal with the types of tax returns, we need to understand the definition of tax returns.
WHAT IS TAX RETURN?
A tax return is a form on which an individual or business; that is a taxpayer makes an annual report of income, expenses and personal circumstances to their tax authority. It allows taxpayers to calculate their tax liability, tax payments, or request a refund for taxes that have been overpaid.
Different countries around the world permit an annual filing for individuals or businesses with reportable income; including but not limited to dividends, wages, interest and capital gains.
3 Types of Taxes
Businesses, big and small, are all required to pay taxes on their income. Which means whatever profit the company makes would be the tax? The type of business often determines how the tax would be paid. The case with small businesses is that the tax is charged on the entrepreneurs’ tax returns.
In the case of a single owned LLC and Sole proprietorship, the income tax is paid based on the net income of the respective business. However, entrepreneurs who function in their companies as employees might not have to pay this tax.
The Sales tax is also known as a VAT or Value Added Tax. It is a huge requirement in most territories. It is often paid to the state department of revenue. There are certain services, goods and products that are eligible for sales-tax. Once identified, the tax must be retrieved and paid regularly.
Two ways of calculating VAT:
- the invoice-based and
- accounts-based method.
The invoice-based method requires that all transactions involving sales should be taxed. Any customer involved in such transactions must inform the VAT attached. The Businesses involved may also earn an incentive on VAT paid. The most popular method is the invoice-based method.
If you have employees under you in your business, you have to deduct specific taxes from your employees’ salaries. The deductibles are normally calculated as a percentage of the salaries that you pay your staff.
There are two categories of taxes:
- taxes paid based on employee salary; and
- deductions from employee wages.
The first type of employment tax is paid from the Business owner’s funds, and this is often related to employing a worker. It comprises of fixed charges that attached to an employee’s pay-check.
The second type of employment tax is the taxes that Business owners are permitted to deduct from the employees’ salaries.
The benefits of paying your business taxes
As a new entrepreneur, raising capital for your business can be a burdened. You recognize that to grow your business, you will need to find a myriad of ways to generate funds and use them for their intended purposes. This becomes less of an issue when you pay the taxes for your business because your business becomes more eligible for government loans, grants, and SME funds. However, if you are a defaulter, then you might not be accepted for a loan.
Another benefit is avoiding the penalties associated with not paying taxes. In almost any country in the world, defaulting on tax payment is illegal, and the implications can include jail time or huge fines. However, you can avoid this if you file your returns regularly and properly while keeping a detailed record.
If tax returns and its processes seem confusing, you are not alone. The truth is that tax returns confused most entrepreneurs. It gets a murkier couple with the complexities of a business. If you find it hard to understand the processes and steps for taking charge of your tax returns or your business; you should employ the services of a tax expert who will properly prepare your returns, calculate payments, and communicate the respective requirements.
It will save you time in having to deal with tax problems that might distract you from your daily Business dealings. Their expertise in the field will also help you escape any penalties that you might otherwise incur from wrong tax processing, which will ultimately save you money.