If you plan to start a new business, or you’ve just opened your doors, it’s important for you to know your federal tax responsibilities. Here are five tips that will get you off to a good start:
1. Choose the Right Business Type: You will need to decide the type of business you are going to establish. The most common types are sole proprietorship, partnership, corporation, S corporation and Limited Liability Company. Each type of business will use a different federal tax form.
2. Know Your Type of Tax: The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax The type of business you run usually determines the type of taxes you pay. It is your responsibility to find out what types of takes you will have to pay. The IRS will not notify you immediately.
3. Get an Employer Identification Number : In most cases, a business needs to use a federal Employee Identification Number for tax purposes. Check IRS.gov to find out whether or not you are required to obtain and use an EIN. An EIN would be a safeguard against identity theft. You can apply for an EIN online.
4. Keep your books in order: By maintaining supporting documents, you will save time when filing your business tax forms at the end of the year. The average time to complete return increases as less documents and information is given. In an audit, the IRS will ask for a receipt or supporting document for expenses over $50.00.
5. Accounting Method — Each taxpayer must also use a consistent accounting method, which is a set of rules that determine when to report income and expenses. The most common are the cash method and the accrual method of accounting. Under the cash method, you typically report income in the year you receive it and deduct expenses in the year you pay them. Under the accrual method, you typically report income in the year you earn it and deduct expenses in the year you incur them. This is true even if you receive the income or pay the expenses in a future year.
If you are in need or more information, contact me. You can also check out the Small Business and Self-Employment Tax Center page on IRS.gov and review the special section on Starting, Operating, or Closing a Business.
Jéneen R. Perkins is a freelance accountant and consultant serving entrepreneurs, families and small businesses. She prides herself in being fluent in English instead of “Accountant-ese”.
"Putting My Money Where My Mouth Is" is a journal about real life experiences and concerns of Jéneen R. Perkins. The purpose of the blog is to exhibit the real life challenges and answer the tough questions posed by the concepts of business, entrepreneurship and money.