2 Smart Ways to Minimize Tax for Online Businesses

taxTax time is an important event of the year for business people. It is a time when business owners start sorting their financial records to see how much they should pay the government this year. The tax season, of course, does not exclude online entrepreneurs. If you have an online business, it is important to know some facts about your taxes and how you can minimize the amount you pay the government.

Use Your Home for Business Transactions

Majority of online entrepreneurs manage their transactions from home. This allows them to take advantage of some tax deductions once they meet certain conditions imposed by the Internal Revenue Service (IRS):
Your home office must be “exclusively” and “regularly” used for business transactions. The space should not be used for personal or family activities, unless you divide its usage time (75 percent for business, 25 percent for homework or gaming);
You must declare your home office as your principal space for business. This means all business activities cannot be conducted elsewhere – like in a rented office space – other than your home office.

Following these conditions will allow you to deduct many of the costs associated with your home, such as utility bills, property taxes, rent or mortgage payments, insurance costs, or even the maintenance costs of your property. However, you cannot deduct the entire amount of your monthly mortgage payment if you use only a small portion of your house for business.

You need to determine what percentage of your home space is allotted for your online business. You can use this figure to compute the deduction you can take. If your home office utilizes 10 percent of your home’s total space, for example, then you can only deduct that much from your monthly mortgage payment. The same applies to all other costs related to your home space.

One disadvantage of using this computation for tax deductions is that you cannot use them to show a net loss in that tax season. For example, if your Internet business realized $50,000 in revenue for 2004 with $60,000 worth of deductions to claim that year, you cannot claim the $10,000 net loss. You can only report zero net gain and carry the remaining amount onto your taxes next year to lessen your tax burden.

Manage the People Working for You

You are required by the law to report how much you paid the people who worked for your online business. These people include the company that designed your website, the copywriters who made marketing letters and press releases for your publicity, and those who respond to customer calls and emails. You have two options to address this issue: classify them as employees or independent contractors.

Independent contractors will not oblige you to pay for their Medicare, Social Security, or unemployment taxes, but you must do so for your employees. This is why most online entrepreneurs prefer to hire independent contractors. However, it is important to always have these people sign a contract that clearly states their position at your company. This will protect both parties, in case of a dispute.

While paying taxes is inevitable, there are plenty of ways to control the amount you pay the government. It is critical to familiarize yourself with the facts about your tax obligations to avoid any inconvenience in the future. That way, you can save more money as you grow your online business.