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If you are starting your own business, don't forget about taxes! For many new business owners, taxes are one of the most confusing parts of switching from a full-time position to self-employment.
Understanding what taxes you should pay, when they are due, and how to make payments can make a real difference in the financial health of your new business. The following tips can help you understand how small businesses are taxed.
Understanding small business tax requirements
- Start thinking about taxes early. Don't wait until April 15th to figure out your business taxes. Business owners can file for a tax extension (Form 7004 for businesses), but this does not delay the payment of taxes, only the filing of returns. You must understand your tax obligations and organize your finances as you start and grow your business. For example, many business owners need to make quarterly tax payments.
- Understand how your business structure impacts your taxes. The business structure you choose, whether an LLC, partnership, S-Corp, or sole proprietorship, will determine what federal taxes you need to pay and even how you pay them. Keep tax considerations in mind when selecting a business structure. If you've already chosen a business structure, use it as a starting point for researching business taxes.
- Find out if you need an EIN Number. If you are a sole proprietor or single-owner LLC and don't have employees, you can generally use your social security number for your taxes. However, larger businesses need an Employer Identification Number or EIN to file taxes. Get an EIN right after you register your business.
- Find out if you qualify for start-up tax deductions. New businesses can deduct up to $5,000 in start-up costs and $5,000 in organizational costs during their first year of business, with the remaining costs amortized over 15 years.
- Plan for income tax. All businesses must file annual income tax returns. (However, partnerships work differently). Your business structure will determine what forms you use to file and whether you need to make quarterly estimated tax payments. Sole proprietors, partners, and S-Corp shareholders who expect to owe at least $1,000 in taxes must make quarterly payments. Not paying quarterly taxes can lead to penalties.
- Account for employment taxes. If you have employees working for your business, you'll be responsible for your employees' Social Security and Medicare taxes, federal unemployment tax (FUTA), and federal income tax withholding. You can learn more about reporting and depositing these taxes on the IRS employment taxes page.
- Learn more about available tax credits. Some tax credits are available to businesses for hiring employees from certain disadvantaged groups (Work Opportunity Tax Credit) or providing health insurance (Small Business Health Care Tax Credit).
- Calculate self-employment taxes. Self-employment taxes consist of Social Security and Medicare taxes plus income taxes. The self-employment tax rate is 15.3%, which consists of 12.4% for Social Security and 2.9% for Medicare. Half of the self-employment tax is deductible on personal income tax returns. You can calculate how much you'll owe using Schedule SE on Form 1040.
- Find out if you must pay excise and/or property tax. If your business has a physical location or assets like vehicles, it is wise to determine if you'll owe property tax on them. Research the laws by looking up your state's government website. Also, if you manufacture or sell certain products, such as alcohol, you may need to pay excise tax. In addition, rules vary from state to state.
- Learn about digital sales and sales tax nexus. As e-commerce grows, some businesses must collect sales tax based on economic nexus laws, even if they don't have a physical presence in a state. Make sure to clarify this, especially since these rules vary by state.
- Research state business taxes. In addition to federal taxes, you may also need to pay state taxes. Again, look up your state's government website to find out the tax regulations for small businesses where you live.
- If you sell goods, understand sales tax laws. Sales tax rules are even more varied. States, counties, and even cities sometimes have their regulations for sales tax. Your state's department of revenue can answer any questions about sales tax for goods you sell.
- Research, research, research. Depending on your business structure and industry type, as well as where your business is located, there may be extra taxes you need to pay or additional tax requirements. Always research before it's time to turn in your tax payments.
- Keep good records. Keep a running file containing all your financial records, including business expenses, with receipts and invoices to ensure you take advantage of all business deductions to which you are entitled. Make record-keeping easier by opening separate business accounts for business transactions, so you don't have to filter out personal transactions down the road.
- Hire an accountant and tax preparer. If you feel out of your depth doing all the tax research and filing all the necessary forms, consider hiring an accountant and enlisting a tax preparer. An accountant or accounting software can help you keep your business's financial records current. A tax preparer will review your financial records and help you calculate and understand your tax obligations. Tax preparers can take care of filing any forms required by the IRS when tax season rolls around, too.
For more information
Learn more about hiring a tax preparer, selecting accounting software, and preparing your business for tax season. Visit the BBB Business HQ for more tips and information on starting and running a small business. See BBB's tax tips for more resources.
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