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Small biz tax review
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June 21, 2001: 11:07 a.m. ET
Take time during the summer to plan your tax strategy for the year
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NEW YORK (CNNfn) - Turbulent economic times call for greater vigilance on the part of small business owners and that includes watching over your taxes. The best way to ensure there are no surprises come next April, is to start planning now.
The first thing most small business owners need to take stock of is their financial outlook for the rest of the year compared with 2000. Many small firms may have to tighten their budgets this year in order to achieve profit margins that compare with the heady years of 1999 and 2000.
How much money you expect your business to take in will help you plan out your equipment purchases, hiring and other major business decisions you need to make over the year.
Estimated taxes
One thing all small business owners need to begin looking at in the summer is their estimated tax payments. Most small business owners, like other self-employed people, pay their taxes on a quarterly basis because they do not have tax payments deducted regularly from their paychecks.
"They need to make sure their payments are on track," said Cindy Hockenberry, an enrolled agent and spokeswoman for the National Association of Tax Practitioners. "There is nothing worse than realizing come April they have underpayment penalties."
The rule of thumb about paying estimated taxes is that if 90 percent of what you ultimately owe is paid by April 15 you should be all right. But if you miscalculate, you may get hit with both a big tax bill and penalties for underpayment. The penalty for underpayment is about 7 percent of the underpayment.
Small biz retirement plans
It may also be a good time to consider whether you want to set up a retirement plan for yourself and for your employees. SEP-IRA plans may be a good choice for self-employed people who don't want to deal with the intense amount of paperwork involved in starting a 401(k) plan, but want something a little more generous than an Individual Retirement Account.
Click here for an IRA calculator
Under a SEP-IRA plan, which stands for simplified employee pension plan, you can contribute up to 15 percent of your earned income with a cap of $30,000 annually and you can change the percentage you contribute every year.
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SEP-IRA
Set aside 15% of earned income up to $30,000
Can set up on the date you file taxes
Contributions are tax deductible
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Although SEP plans can be set up and contributed to up to the date you file taxes, it is best to start setting aside money now, especially if you want to set aside the maximum amount. With extensions, some self-employed people could establish a SEP retirement plan and make their contribution as late as Oct. 15.
One caveat: if you open a SEP-IRA you have to make it available to your employees as well and contribute the same percentage to their accounts as you do to your own.
Special Report: Midyear Financial Audit
Another type of retirement plan preferred by small business owners is a SIMPLE plan, which stands for savings incentive match plan for employees. Employees can contribute a percentage of their salaries, pre-tax, to such plans and receive matching funds from the employer.
Although more generous than an IRA, the ceiling on SIMPLE plans is $6,500, much less than the amount one can stash away in a SEP-IRA.
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SIMPLE plans
Ceiling on SIMPLEs is $6,500
Must be set up by October 1
Contributions are tax deductible
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These contributions are tax deductible as business expenses and therefore reduce the business's taxable income. It is important to get a jump on starting SIMPLE plans, however, because they must be set up by Oct. 1, more than seven months prior to tax filing.
"People often wait until the last minute to get this done and realize they can't do it this year," Hockenberry said. "Another reason they should plan early is so they can notify their employees so they can start deferring their money."
Look early for deductions
The self-employed also should use any down time in the summer to educate themselves about changes to the tax code that may benefit them. For example, under the tax bill passed by Congress and signed into law by President Bush, self-employed people will be able to deduct 100 percent of their health-care costs this year. Previously, only 60 percent of health-care costs were deductible.
Also consider whether you are going to need to take some deductions and keep in mind that their may have been changes in the amounts of deductions the Internal Revenue Service allows this year compared with last. For example, small business owners can deduct up to $24,000 during 2001 for new equipment 
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