Starting a business can be frightening and confusing with all the different rules, regulations and steps you must take before you even make your first dollar. But owning your own business can come with some of the greatest rewards. One of the most important things to remember when starting a business is to make sure you’re staying compliant with your taxes. Here are a few tips to help you stay out of tax trouble!
Have the Right Business Structure
One of the earliest choices you will make is you will decide on what type of structure your business will be. This can be a Sole Proprietorships, Partnerships, Corporations, S Corporations, and Limited Liability Company (LLC). Your business structure determines which income tax return form you must file each year.
Make Sure You Operate as a Business, Not a Hobby
The IRS must view your business as a business so you qualify for all the necessary documents. If the IRS thinks it’s a hobby, losses you incur from that business are not tax deductible. To make sure the IRS knows it’s a business, write out a business plan and document all marketing and business efforts. The IRS must view your business as having a reasonable expectation of earning a profit. The IRS will presume your activity is a business if there is a profit during 3 of the past five years.
There are four general types of business taxes. You have income tax, self-employment tax, employment tax and excise tax. Keep in mind, the types of tax your business pays depends on the type of business structure you set up. For income tax, all businesses except partnerships must file an annual income tax return. Partnerships file an information return. The Federal income tax is pay-as-you-go-tax. You must pay the tax as you earn or receive income during that year. An employee usually also has income tax withheld from his or her pay. Self-Employment tax is a Social Security and Medicare tax primarily for individuals who work for themselves. Your payments of SE tax contribute to your coverage under the social security system. When you have employees, you as the employer have certain employment tax responsibilities that you must pay and forms you must file. Employment taxes include social security and Medicare taxes, federal income tax withholding, federal unemployment tax. Lastly, Excise Tax is the tax you may have to pay if you do any of the following: manufacture or sell certain products, operate certain kinds of businesses, use various kinds of equipment, facilities, or products, or if you receive payment for certain services. You can find out more about excise tax and who has to pay it here. You may also need to make estimated tax payments each quarter if your business structure requires it.
Employer Identification Number (EIN)
You will need to get an EIN for federal tax purposes. An EIN is used to identify a business entity. You can find out if you need an EIN here and can apply online for the EIN for free using the IRS website.
Document Your Income & Expenses
It’s important to keep track of all your income and all the expenses you incur so you can report them accurately to the IRS. You can use tax software or excel sheets to help track all your expenses. You should also keep all your receipts in a safe place, so you have proof of your expenses.
Employee Health Care
The Small Business Health Care Tax Credit helps small businesses pay for health coverage they offer their employees. If you have fewer than 25 employees who work full-time or a combination of full-time and part-time. The maximum credit is 50% of premiums paid for small business employers.
If you are thinking of starting a business or already have and are needing help staying on track, Polston Tax can help! Our team of tax accountants and tax preparers can help make sure you make all the required tax payments and that you take advantage of every tax deduction. Call us today at 844-841-9857 or click below to schedule your free consultation!