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. You need to 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. But larger businesses need an Employer Identification Number or EIN to file taxes. Get an EIN right after your register your business.
- 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.
- 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.
- Calculate self-employment taxes. Self-employment taxes consist of Social Security and Medicare taxes plus income taxes. You can calculate how much you’ll owe using Schedule SE on Form 1040.
- Find out if you need to pay excise and/or property tax. If your business has a physical location or assets like vehicles, it is wise to find out 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.
- 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 own 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 do plenty of 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 up to date. A tax preparer will look at 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.