Millennials have become a big force in the small business scene. Entering the workforce during a recession and a time of soaring, high education costs, they’re sidestepping traditional career paths and building businesses at twice the rate of their predecessors.
But paying taxes as an entrepreneur is much more complicated than paying taxes as an employee. Small business owners can’t rely on an employer to withhold taxes and issue a W-2 at year-end. Instead, they must learn to navigate bookkeeping, estimated tax payments, deductions and tax credits. So how do millennials compare to other generations when it comes to taxes?
In 2015, Experian analyzed the demographic and credit characteristics of millennial small business owners and found that millennials tend to be less educated than other generations. In fact, 15% haven’t earned a high school diploma. But that doesn’t suggest that millennials aren’t thinking about the future. The findings indicate that many members of this generation opted for entrepreneurship rather than education.
Millennials tend to start businesses in industries that don’t require a four-year degree. Think: business services, building cleaning and maintenance, general contracting, motion picture and video and beauty shops.
They also tend to be smart about where they start. The same study revealed that 68% of millennial small businesses were started in California, Texas and Florida. Why is this important? California, despite its high state income tax rates, is a tech hub. Texas and Florida do not have a state income tax.
Bank of America’s 2016 Small Business Survey found that millennials tend to have a more optimistic outlook than other generations. In a survey of 1,000 small business owners across the country, 81% of millennial small business owners expect to see revenue growth in the coming year, higher than Gen Xers (65%) and Baby Boomers (46%). Millennial small business owners also have a brighter outlook on hiring, with 48% planning to hire in the coming year, compared to 34% of Gen Xers and 19% of Boomers.
Millennials may be more optimistic, but the majority of US small business owners are concerned about taxes, no matter their generation. A Wells Fargo/Gallup poll of small business owners found that the biggest issues keeping small business owners up at night are taxes, health care and governmental regulation.
With a new administration in Washington, small business owners cite a stronger economy, a reduction in taxes on small businesses and a simplified tax code as the top impetus for small business growth the coming years.
A 2016 NerdWallet and Harris Poll survey found that 80% of millennials are concerned about filing taxes, including making a mistake, not getting a refund or paying too much. They’re also less likely than other generations to get professional tax help.
Millennials may feel they can handle taxes themselves when they don’t have complications such as dependents and mortgage interest, but hiring a tax professional is a wise decision when it comes to business taxes. Otherwise, you could end up missing out on valuable deductions, credits or tax planning strategies.
Do you still think you can’t afford to hire professional tax help? Consider how long it takes you to prepare your tax return. The IRS estimates that the average taxpayer filing a Schedule C or other business forms with their Form 1040 spends an average of 22 hours preparing their tax return, including record-keeping, tax planning and form completion and submission. How much is your time worth? If you regularly bill your time at $100 per hour, you are essentially spending $2,200 to do your taxes yourself.
A 2016 Wells Fargo Millennial Small Business Owner Study found that only about half of small business owners rate themselves as being somewhat knowledgeable and successful in managing their business finances.
Despite feeling like they need some assistance, when they do seek help, it’s usually not from paid professionals. Eighty-two percent of millennial small business owners turn first to friends and family when they’re looking for help managing their finances.
Budget concerns are undoubtedly the main reason millennial small business owners don’t seek professional help. However, accountants have been trusted and respected allies of small business owners since the days of the abacus. Their experience in financial projections, legal structure, managing payroll, recording complex financial transactions and preparing financial statements can be priceless. You may not need a full-time accountant on staff or even one on retainer. Sometimes just a couple of hours a month is cost-effective and enough to give a small business owner peace of mind.
Considering millennials spend about 90 hours a month on smartphone apps, it makes sense more and more mobile apps are being created to help manage business finances and taxes. Here are a handful of excellent apps and other resources to help business owners get a handle on their finances and taxes.
Invoices, Expenses and Reports
Whether you work from a home office or on-the-go, manage your business from the cloud. FreshBooks is a ridiculously easy-to-use platform for creating and sending invoices, logging expenses and keeping track of your business reports come tax time.
Tracking business miles is an essential task for anyone who drives for work, yet one that most business owners let fall by the wayside. MileIQ automatically detects every mile you drive, letting you classify the trip as business or personal at your convenience. The app then calculates the value of your drives based on IRS standard mileage rates. Your complete driving history is stored securely in the cloud so you can provide a detailed mileage log to your accountant—or an IRS auditor—whenever you need it.
Payroll and Benefits
Whether you have one employee or 10, setting up a payroll system streamlines regulatory compliance and protects you from incurring costly IRS penalties. Gusto allows you to save time by handling payroll taxes, year-end forms, Affordable Care Act compliance and tracking time off.
Professional Tax Planning and Preparation
If you do seek out professional advice, make sure you get it from a qualified source. Unfortunately, in most states, tax preparers are less regulated than hairstylists—almost anyone can start a tax preparation business with little to no education or experience. Find reputable help using the IRS directory of credentialed, qualified tax preparers near you.
The IRS also offers extensive resources in their Small Business and Self-Employed Tax Center, including information on filing and paying business taxes, virtual workshops and videos with topics of interest to small business owners.