- 2020 taxes are done, and it’s time to start preparing for filing 2021 taxes
- Top 8 tax tips:
- Get to know the new tax brackets
- Pay estimated taxes on time
- Keep records organized
- Master the home office deduction
- Prepare to file electronically
- Classify your business properly
- Deduct charitable contributions
- Get help from a tax expert
Now that 2020 taxes are complete, it’s time to focus on what’s next for your business. As the global pandemic continues, there are still additional tax considerations regarding the relief provided by the government this year. In addition, there are changes to tax brackets to be aware of and other laws to pay close attention to as you’re getting ready for the next tax season.
Here are a few facts about paying 2021 taxes and some important tax tips this year.
Paying taxes for 2021: What to know
First, let’s cover a few details about paying taxes for the year 2021:
- Taxes will probably be due April 15, 2022, unless the IRS extends the deadline again (in 2021, the 2020 tax deadline was pushed to May 17).
- The standard increased in 2021: $12,550 for single filers, $25,100 for joint filers, and $18,800 for heads of household. These increases may mean that it makes sense for you to take the standard deduction rather than itemize. Figure out if your business expenses are greater than these amounts. Most Americans take the standard deduction.
- Because there was another stimulus package passed in early 2021—known as the American Rescue Plan—next year’s tax season will still be impacted by pandemic-related legislation, including stimulus payments and related credits.
To keep up with what’s happening in 2021 and to stay prepared, here are eight tax tips:
1. Get to know the 2021 tax brackets
The seven tax bracket percentages are the same for 2021: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. However, the taxable income thresholds have increased.
For example, income up to $9,950 is taxed at 10% for single filers, up from $9,875 in 2020, and married couples’ income from $81,051 to $172,750 is taxed at 22%, up from $80,251 and $171,050, respectively, in 2020.
Check the full list of tax bracket changes before preparing your taxes. Remember, if you run your own business, you’ll have to pay an additional self-employment tax, which is 15.3%.
2. Pay estimated taxes on time
You may need to pay estimated taxes throughout 2021 and into early 2022 if you earn income as a sole proprietor, partner, S corporation shareholder, or corporation owner, in some cases. Estimated taxes are due April 15, June 15, September 15, and January 15 (of the following year) unless the IRS announces different deadlines.
Note that you probably must pay both state and federal estimated taxes by these dates for each quarter, so be sure you know the procedures for paying your state. You’ll need to pay based on estimates of what you’ll make each year, which usually come in the form of vouchers for each upcoming year when you file your tax return. Always make sure to pay by the deadlines, so you don’t incur a penalty.
3. Keep records organized
One of the biggest mistakes some business owners make is not keeping the right records throughout the year. Start now by keeping all receipts and tax documents stored in one place. Create spreadsheets to track income and expenses, or use a tool like QuickBooks that will do a lot of the work for you.
Make sure you know which tax forms will be coming your way from clients, if applicable, so you know when you’re ready to file next year.
4. Master the home office deduction
Remember, just because you worked from home this year doesn’t mean you’ll be able to take the home office deduction if you’re a regular W-2 employee. However, if you run your own business or are an independent contractor, you can claim this deduction as long as you have a dedicated workspace in your home, you use it regularly and exclusively for business, and it is your principal place of business.
5. Prepare to file electronically
The IRS encourages taxpayers to file their tax returns electronically each year. Doing so expedites the process, meaning you can get your refund weeks earlier than if you filed via paper. Filing electronically also allows for better accuracy and completeness, along with confirmations that the IRS has received your return. If you haven’t been filing electronically, 2021 is the time to start.
On a similar note, remember to start using direct deposit, so you get your refund faster from the IRS and don’t have to wait for a check to come in the mail.
6. Classify your business properly
Classifying your business structure incorrectly can lead to paying too much in taxes. You may benefit from creating your business as a pass-through entity, such as a sole proprietorship, partnership, or S corporation, instead of a C corporation. Talk to a tax expert who can help you determine the best course of action.
7. Deduct charitable contributions
Normally, you wouldn’t be able to deduct contributions to charities unless you itemize. But the government extended legislation into 2021 for a $300 charitable deduction for taxpayers who don’t itemize, and married couples can now deduct $600.
If you do itemize deductions, you can deduct even more contributions from your income, lowering the tax burden. In this case, you can deduct cash donations up to 100% of your income thanks to the CARES Act and 50% for noncash contributions.
8. Get help from a tax professional
Finally, consider getting help with your taxes this year. There are always changing tax laws and new deductions and credits, so you never want to miss anything. Tax experts can assist all year long to help ensure the right business practices maximize profits while reducing the amount you have to pay come tax time.
Contact the tax professionals at Provident CPA & Business Advisors
You may have numerous questions regarding a 2021 tax plan since we’re still in a pandemic, and a lot may have changed for your business. Get help with tax planning and preparation—along with strategic business assistance—from the experienced team at Provident CPA and Business Advisors.
Contact us to learn more.