With the rise in entrepreneurship in the U.S., the IRS is reminding taxpayers of the resources available to those who are looking to start their own businesses. Optima Tax Relief discusses the important tax responsibilities new business owners have.
The first step in starting a business is choosing a business structure. This is important as it will determine which tax return will be filed.
- Sole Proprietorship: A single person owns an unincorporated business
- Partnership: Two or more people manage and operate a business
- Corporations: Shareholders exchange money and/or property for stock in the corporation
- S Corporations: Corporations that elect to pass on income, losses, deductions, and credits to their shareholders for tax purposes
- Limited Liability Company (LLC): Entities that can be treated as either a corporation or partnership depending on the elections made
A business owner must also understand what taxes they are responsible for paying and also how to pay them. There are four general types of business taxes, including:
- Income tax: An annual income tax return must be filed by all business types, except for partnerships that should file an informational return.
- Self-employment tax: This social security and Medicare tax contributes to the individual’s coverage.
- Employment tax: This tax applies to businesses with employees.
- Excise tax: This tax is imposed on specific goods, services, and activities. Some examples include alcohol, gasoline, betting, insurance premiums, and more.
Next, business owners should get an Employer Identification Number (EIN) from the IRS. This number helps identify a business and can be obtained by applying for one online, via fax or mail or by calling the IRS if the applicant is not in the U.S.
Choosing a tax year is also very important for business owners as it will determine their annual accounting period for reporting revenue and expenses. Typically, small businesses use either a calendar year or a fiscal year. A calendar year begins on January 1 and ends on December 31 while a fiscal year is a 12-month period that ends on the last day of any month except December.
Once these initial decisions have been made, the most important objective becomes keeping records of all business transactions, including deductions, expenses, income, assets, and more to ensure tax filing goes smoothly. For best practice, small business owners should maintain these records for a minimum of 3 years.