Top 10 cities with the most small businesses & tax implications

July 18, 2019 : H&R Block

Owning a business is the quintessential American Dream. Entrepreneurs get to be their own boss and do work they are passionate about and have chosen to do. That sense of autonomy and untapped potential may be why a recent H&R Block survey found that 43% of Americans think that those who own their own business are more successful than those who don’t.

Entrepreneurs are in every state of the U.S., but to determine the top startup cities in the country, H&R Block looked at data from tax returns filed in 2018 and identified where the most business owners are opening their doors:

  1. Hialeah, Fla.
  2. Los Angeles, Calif.
  3. Irvine, Calif.
  4. Miami, Fla.
  5. Oakland, Calif.
  6. San Francisco, Calif.
  7. New Orleans, La.
  8. New York, N.Y.
  9. Austin, Texas.
  10. Scottsdale, Ariz.[1]

Like most things worth doing in life, launching and successfully operating a business is no easy task. There are numerous challenges to face and many factors at play, but at the end of the day, savvy money management is paramount.

Not surprisingly, owning a small business is also one of the most common triggers of increased tax complexity, and getting taxes wrong is costly. Overpaying or underpaying taxes can have serious financial ramifications for a business — especially one that is just getting off the ground. In addition, the Tax Cuts and Jobs Act introduced a slew of new tax reform provisions in 2017, the most complicated of which happen to affect small business owners. Subsequently, there are many things small business owners must take into account when doing their taxes.

Tax reform changes the game

One of the biggest complexities brought about by tax reform is the new 20% qualified business income deduction some business owners and independent contractors can take when they file their tax returns in 2019.

Generally, the 20% deduction means an eligible business owner with $50,000 in qualified business income could deduct up to $10,000. This generous tax benefit is meant to level the playing field between businesses filing as C corporations, which have a 21% tax rate, and small businesses paying individual tax rates ranging from 10 to 37%.

Small business tax tips

An increasing number of Americans are turning to the sharing economy or gigging to earn a living or to supplement their main income. And like small business owners, those who are doing so face more complicated tax requirements. Often, people who only work the occasional side job are caught off guard by unexpected tax complications.

No taxes are withheld from the income earned from a business in the sharing economy but, in addition to owing self-employment tax, the small business owner also must pay federal income tax on their earnings. That means, depending on their tax situation, they’ll be taxed at a rate of 10% to 37% of their net profits.

Timing is another consideration for small business owners. If taxpayers wait until April to pay their tax bill, they could end up incurring an estimated tax penalty. To avoid this penalty, they must pay 90% of the tax they owe for the current year or 100% of the tax owed for the previous tax year.

They can pay what they owe by making estimated tax payments four times a year: in April, June, September and January. If they have a traditional job as well, they could instead adjust their withholding with their regular employer to cover the taxes they will owe from their sharing job.

The flip side of being self-employed and paying self-employment tax is that certain expenses are deductible against income. Sharers can claim their expenses for running their business (on things like advertising, vehicle licenses and car expenses such as gas and repairs) as deductions on their tax return. It’s important to keep receipts for all the items purchased to run their business. And whether they use IRS’ standard mileage rate or actual costs to calculate their deductible vehicle expenses, it’s essential that they keep a log of miles that they traveled for business.

By the end of January each year, taxpayers should receive a Form 1099-MISC with income reported in box 7, reflecting the income earned working as an independent contractor. They’ll need to report all this income on Schedule C of their federal income tax return. The IRS also receives a copy of any Forms 1099 taxpayers receive and will match that information against the tax return to make sure the taxpayer reports all their income.

It’s a common misconception that if a taxpayer does not receive a Form 1099, or if the income from the side job is less than $600, that income isn’t taxable. This isn’t true. All income earned through a business, as an independent contractor or from informal side jobs, is self-employment income, which is fully taxable and must be reported on Form 1040, Schedule C. If net profit exceeds $400 for the year, they’ll also need to prepare Form 1040, Schedule SE, for self-employment taxes.

Getting the help to succeed

So, whether it’s a newly launched tour company in Miami Beach, or a boutique clothing store in San Francisco going on its third year, enlisting help from a knowledgeable and experienced tax advisor can help keep business and individual finances on track and alleviate the stress of managing complicated tax matters. Plus, business owners get the extra time and peace of mind they need to focus on other aspects of their company that need attention.

To find the right tax advisor, small business owners should set up a meet-and-greet with any candidate they’re considering. And when they meet with that person, they should be prepared to ask them questions and gather intel on their experience and background. Be sure to ask them about their specific credentials and areas of expertise, because qualifications are critical when it comes to tax management and accounting. To get the most effective small business tax tips and advice, entrepreneurs will want to find a tax preparer who has specific experience in areas that are relevant to their business.

It’s also important to find out how the advisor can help lower the tax liability for their business and what they would do in the event that the business owner gets audited. A good tax advisor can offer tax planning year-round and work to minimize a small business’ tax obligation by staying abreast of its financials throughout the year. One of the most helpful things a tax advisor can do for small business owners is help determine whether it would be advantageous tax-wise to accelerate or defer income and expenses. A tax advisor should also guarantee their work and pay any penalties that are incurred due to errors on the tax return.

When interviewing potential tax advisors, also be sure to ask them about their availability, what modes of communication they use and what additional support they can provide. At the end of the day, it’s important to hire someone who meets the individual needs and preferences of the small business owner. To learn more and get assistance with your small business tax needs, consult an H&R Block tax professional for assistance.

[1] Methodology: top U.S. cities with the highest percentage of declared business owners.

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