Starting a business can be overwhelming enough trying to get up and running but when you think about all
tax requirements, your cup may runneth over. Here is what you must know in order to start your own business on right foot and avoid paying penalties and interest which can cost more than paying an accountant to do things right first time.WHAT FORM OF BUSINESS SHOULD YOU SET UP WHEN STARTING YOUR BUSINESS?
There are several different options including a sole proprietorship, partnership, corporation, S corporation or limited liability company. In general a sole proprietorship works fine if you are very small, not too profitable and aren’t concerned about legal liability issues. A partnership is like being married to other partners. If you aren’t that cozy with them, you may want to set up another type of entity. Corporations are best suited for business owners who want personal legal protection and have profit available beyond what they will need for their personal use. See http://www.dgoodmancpa.com/smallbusinessretirementplan.htm for an example of what you can do with that available profit tax deferred until retirement. S Corporations are best when you are operating at a loss and want business owner legal protection. Limited liability companies will protect business owner from personal legal liability and, if structured properly, can be a partnership, corporation or owner for federal income tax purposes.
DO YOU NEED AN EMPLOYER IDENTIFICATION NUMBER (EIN) WHEN YOU START YOUR OWN BUSINESS?
You need an employer identification number if you have employees, have a qualified retirement plan, operate as a corporation or a partnership, or need to file employment or excise tax returns. You do not need an employer identification number if you are a sole proprietor and don’t meet any of requirements above.
WHAT METHOD CAN YOU USE TO ACCOUNT FOR YOUR INCOME AND EXPENSES WHEN YOU START YOUR SMALL BUSINESS?
The two most common methods are cash and accrual. The cash method in general allows you to report income and expenses in tax year you receive it. The accrual method in general allows you to report income and expenses in tax year you earn or incur it even if you haven’t received payment or paid it yet.
WHAT KINDS OF FEDERAL TAXES WILL YOU OWE WHEN STARTING A BUSINESS?
All businesses must file a return. The form used depends on what form of business you set up when starting your business. The federal income tax is a pay-as-you-go tax. In general you must pay tax as you earn or receive income during year to avoid penalties and interest if your tax liability for year exceeds $1,000 including self employment tax for sole proprietors, partners and S corporation shareholders. Corporations should make estimated quarterly payments if they expect to owe $500 for year. Estimated tax payments are due quarterly. Penalties and interest can be hefty so you should make sure you comply in order to avoid wasting money on IRS penalties.
