Getting Started with Taxes
Whether your business is already up and running or just starting up, you need to know how federal tax guidelines will impact your small business. It’s important not to overlook the ins and outs of tax preparation, since taxes are one of the most important bookkeeping and accounting tasks you’ll perform in a small business. This post will cover several of the steps you should take as a small business owner to ensure tax compliance. Keep in mind that state tax compliance guidelines will vary.
According to some reports, the U.S. Internal Revenue Service has paid closer attention to small business tax compliance in recent years. This means you need to make sure you dot all your “i’s” and cross all your “t’s” when it comes to setting up and operating your business.
Essential Tax Know-How
Although every business is different and has different tax liabilities, there are several things a business can do to prepare effectively for tax time, especially if you’ve just started your business.
Select a business structure
If you’re just starting out, one of the most important decisions you will make as a small business owner is choosing your business structure. Your business structure is the legal entity through which you do business. Your choice impacts your tax liability going forward and can help you maximize your deductions.
Most small business owners choose to set up their businesses as a sole proprietorship. Going this route can make it easy for individuals to set up a business.
Sole proprietorships are fairly easy to set up and filing taxes is simpler compared to other business types. Most importantly, sole proprietors are taxed at a lower rate than most other business types.
Sole proprietorships do have a few drawbacks that you should keep in mind. While being a sole owner gives you more control over your business, you’re also liable for all debts incurred by the business. And on the tax front, you’re responsible for paying self-employment taxes. This includes both Social Security and Medicare.
Because so many small business owners go the sole proprietor route, we chose to make it the focus of this post. Keep in mind that as your business grows and matures, it may be necessary to choose a more appropriate business structure.
Those can include:
- Partnerships, in which two or more people share in the profits and losses of a business
- A corporation, which is a legal entity created to conduct business, and..
- Limited liability corporations, which offer some of the benefits of the corporation and the partnership
Apply for An Employer Identification Number (EIN)
A business owner has a lot to think about when he or she is getting a business started. During the early days of a business you’re fired up and eager to share your products or services with customers. It’s easy to forget about things like taxes when they’re months or a year away.
Don’t overlook the important step of applying for an Employer Identification Number or, as it’s also known, a Federal Tax Identification Number. This number identifies your business with the federal government and the Internal Revenue Service. The IRS website allows you to quickly and easily apply for an E.I.N. online. Don’t forget to do this!
Determine your tax year
For most individuals, the tax year is the annual accounting period you’ll use when filing taxes, usually January 1st to December 31st. This will hold true for most businesses. Larger companies and corporations may choose to file using a fiscal year. Unless you run a seasonal business, for example, it’s probably a good idea to file on the calendar year basis.
Keep and maintain accurate records
Maintaining complete and accurate records makes the tax filing process that much easier. Carefully tracking and documenting all of your business’s transactions and events helps you prepare the necessary financial statements and file your return. Implement a trusted system. Many sole proprietors use Quickbooks but there are other options for record keeping. If you haven’t already, look into one to save yourself a headache come tax season.
Complete a Schedule C form
As the owner and operator of a business, you need to report the profit and loss associated with that business on the IRS’s Schedule C form. The Schedule C form accompanies your main tax return and helps the IRS calculate your tax liability. You’ll also declare tax deductible business expenses on this form.
Tax Reduction Tips!
Taxes are a necessary burden for any small business and you could probably use some help to lessen that burden. We’d like to offer some tax reduction tips. From day one you should look to reduce your overall tax burden. Here are some suggestions:
- You can claim a deduction for some expenses such as rent or business equipment.
Keep in mind that some business startup expenses can also be tax deductions. There are too many to provide a complete list but here’s a few:
- Research costs involved in investigating the creation of your business
- Organizational costs involved in setting up your business such as legal or other fees
- Some costs involved in preparing the business to open, such as advertising and employee training.
Don’t wait until just before tax time to implement the steps we covered. Research your tax obligations as early possible to ensure you pay the appropriate taxes. Consulting with a tax preparation professional can help you kickstart this process. You’ll also want to research all of the deductions that apply to you and your business.
It’s hard enough to start a business. Maximizing your deductions for things like startup expenses can help ease the pain a little…and every little bit helps.