Four Things to Know about Taxes and Starting a Business
New business owners have tax-related things to do before launching their companies. Here are some items to consider before scheduling a ribbon-cutting event.
1. Choose a business structure
When starting a business, an owner must decide what type of entity it will be. This type determines which tax forms a business needs to file. Owners can learn about business structures at IRS.gov. The most common forms of businesses are:
2. Determine business tax responsibilities
The type of business someone operates determines what taxes they need to pay and how to pay them. There are the five general types of business taxes.
- Income tax – All businesses except partnerships must file an annual income tax return. They must pay income tax as they earn or receive income during the year.
- Estimated taxes – If the amount of income tax withheld from a taxpayer’s salary or pension is not enough, or if the taxpayer receives income such as interest, dividends, alimony, self-employment income, capital gains, prizes and awards, they may have to make estimated tax payments.
- Self-employment tax – This is a Social Security and Medicare tax. It applies primarily to individuals who work for themselves.
- Employment taxes – These are taxes an employer pays or sends to the IRS for its employees. These include unemployment tax, income tax withholding, Social Security, and Medicare taxes.
- Excise tax – These taxes apply to businesses that:
- Manufacture or sell certain products
- Operate certain kinds of businesses
- Use various kinds of equipment, facilities, or products
- Receive payment for services
3. Choose a tax year accounting period
Businesses typically figure their taxable income based on a tax year of 12 consecutive months. A tax year is an annual accounting period for keeping records and reporting income and expenses. The options are:
- Calendar year: Jan. 1 to Dec. 31.
- Fiscal year:12 consecutive months ending on the last day of any month except December.
4. Set up recordkeeping processes
Being organized helps businesses owners be prepared for other tasks. Good recordkeeping helps a business monitor progress. It also helps prepare financial statements and tax returns. See IRS.gov for recordkeeping tips.
@Bill Hampton thanks Great summary,
Just curious what made you throw this up on the forum.
I thought it would help someone.
Wish I had this 18months ago. A simple as it sounds there are things you might miss. The cost is an IRS fine of $198pm for each LLC member for getting the tax side wrong. Ask how I know. Yes I do have a cpa and no it was not her fault.
Great post, especially if it helps a single person avoid trouble.
Just a clarification:
Sole Proprietorships do not file a separate income tax return. Income is reported on the appropriate schedule (usually C or E) of the owner's Form 1040.
Partnerships DO file an annual report of income on Form 1065. Form 1065 in turn reports taxable amounts to the partners for inclusion on their income tax return.
S Corporations, tax-wise, are similar to partnerships, but there are some important differences.
Limited Liability Companies are also similar to partnerships, but, again, with differences. However, if the LLC has only one owner, it can elect to be a disregarded entity for tax purposes. In such case, it is taxed like a sole proprietorship. (Just to add confusion: LLCs can also elect to be taxed as a corporation or an S corporation.)
Some states have laws that are different than federal law. The most common difference is that the state will impose some tax or fee on pass-through entities where the federal government does not.
Many business organizations are required to have the same fiscal year as their owner(s) have or to basically have a deposit with the IRS to compensate for timing differences.
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