Many times, when people start a new business, they feel just so excited to get going and to begin their services or sell their products, they do not think or know what some of the tax basics are. There are many tax basics that a business owner should know and be ready for.
Regardless of the type of business you wish to begin, there are some basic tax concepts you should know before you launch your new business!
What Tax Basics Do You Need to Know to Start a Business?
As you prepare your new business to launch, you will probably be doing market research, creating a business plan, getting your business cards, getting your logo designed, and deciding how to fund your business. There are many startup costs that you will probably incur. You may need to obtain financing through a bank at this time.
One thing you will need to do which will affect your taxes is deciding which type of business entity you want your business to be. The different business entities you can choose from:
- Sole Proprietorships
- S Corporations
- C Corporations
- Limited Liability Companies (LLCs).
If you choose to start a partnership, you will have a “pass-through” tax entity. This means you will not pay income taxes for the business itself. Instead, the tax responsibilities will fall on you, the partner.
Regardless of the entity you choose, you will need to get your federal and state tax ID numbers. Your EIN is an employer identification number that the IRS uses to identify taxpayers who need to file business tax returns.
How Can I Save Money on My Business Taxes?
This is the question on the minds of many new business owners. How will I pay corporate tax? What will I need to pay on my federal income personal taxes? Do I need to pay taxes throughout the year or only once a year as my annual tax return?
More importantly, many business owners want to know how they can save money on their taxes.
One way you can save money on your taxes is to take a tax deduction. Tax deductions, like tax credits, can help lower your tax bill. Unlike tax credits, tax deductions do not lower your tax bill dollar-for-dollar. Tax deductions reduce your taxable income, which can save you big on your tax return!
Many tax deductions are made especially for business-related matters. For example, you can deduct business-related travel, meals, rent and utilities, automotive expenses, office supplies and equipment, business insurance, certain legal and accounting fees as they relate to your business and state and local taxes.
Home Office Deduction
If you work from home, you should be able to take the home office deduction, provided your expenses are ordinary for your business. Also, your home office must be the chief place of residence for your business.
Each tax deduction for businesses has its own rules, so it’s important that you understand what you can and cannot deduct and how much is deductible.
You will want to keep organized, detailed, and meticulous records. This means you will want to store and organize all receipts, bills, invoices, and other business-related documents. You must have proof you can take a tax deduction in the event you get audited. There are several documents you will want to have handy if the IRS knocks on your door.
If you are planning to deduct your mileage from business-related trips, for example, you will want to maintain an accurate mileage log. You are able to deduct mileage using one of two methods: (1) The Standard Mileage Rate or (2) The Actual Business-Related Automotive Expenses. If you do not know how to maintain a mileage log, read our article on mileage logs.
Keeping Good Records
Whatever documentation you keep and organize, you will want to make sure it has the name of the business establishment you worked with, the amount of the item or expense, and the date of the transaction. Keeping perfect records may seem like a lot of work, but you will be happy you were well-organized once tax season rolls around. You may want to work with an accounting firm to help you keep track of everything.
Another consideration you will need to make when determining how much tax you need to pay is whether or not you are required to pay estimated quarterly taxes. If you expect to owe the IRS a specific amount of tax when tax season rolls around, you will need to pay estimated quarterly taxes. If you do not pay them, you may be subject to penalties and fines.
This is just one reason it’s a good idea to work with a tax accountant, someone who knows the tax laws and whether you’ll need to pay taxes throughout the year. The last thing you want when tax season comes along is an unexpected tax debt.
Should You Hire Someone to Do Your Taxes?
Many big and small business owners turn to professional tax preparation services when tax season comes along. A tax consultant should know the right tax forms to use and how to file taxes the best way. Even sole proprietors and freelancers turn to tax professionals to get the best tax breaks.
Your best bet is to find a tax consultant that you can work with all year long. Establish a good relationship with a tax professional when you start your business. They will be able to guide you through any situations that might arise.
Tax professionals know which tax credits and tax deductions are right for your business, and they can determine if you will owe money to the IRS or will be owed a tax refund. Many tax services can also help you with other financial and accounting matters, such as managing your income and expenses.
Do I Need to File Employment Taxes?
If you are paying employees, you will need to file employment taxes. These include federal and state taxes, Social Security and Medicare taxes, and FUTA (Federal Taxes for Unemployment).
What to Do If You Are Self-Employed
You may think that you only need to pay taxes in April when your individual tax return is due, but if you earn a certain amount of money, even if you are self-employed, you may need to be paying estimated tax payments throughout the year. It’s very important to accurately estimate your payments, so you do not end up with a large amount of tax debt.
Do you have to pay self-employment tax? If you are a sole proprietorship or own your business, more than likely, you are self-employed. The IRS goes into detail on this topic, explaining exactly who needs to pay self-employment tax. So, if you are self-employed, you need to determine if you even need to pay the self-employment tax to the IRS.
Then, if you are self-employed, you’ll need to pay self-employment tax, which is made up of Medicare and Social Security. If you want to know an approximate amount to set aside for taxes, Dave Ramsey recommends self-employed individuals set aside about 25-30% of their total earned income for income and self-employment taxes.
You may feel overwhelmed now that you’ve learned a bit more about tax basics for new businesses. It’s understandable, but realize that when tax time rolls around, you will be able to write off some of your expenses by taking business tax deductions. Remember to keep good, detailed records and to hire a qualified tax consultant to help you get the best tax benefits.
Learn even more about how to start a business in our complete guide for businesses. Are you now ready to launch your first business?
Do you need help filing your return this year? If so, you can turn to Borshoff Consulting. We do business and individual taxes, audit representation, and business consultations.
Find out how you can get a free consultation today! You can trust Indiana’s tax expert!