Starting a new business? Consider these tax items

Your Guide to State, Local, Federal, Estate + International Taxation

business, taxMany people dream of starting their own business. The idea of becoming an entrepreneur produces notions of freedom and wealth. In fact, the Bureau of Labor Statistics (BLS) reports that on average 650,000 new businesses are started each year in the U.S.

The problem is that most people don’t realize that there is this not-so-dreamy part of starting a new business which includes lots of paperwork, taxes and legal activities. Below are several general tax-related items that you will certainly need to take into consideration before starting your new small business.

Choosing a business structure

The first step in forming your business is to decide what form of business entity to establish. Your form of business determines which income tax return form you have to file. These are the most common business structures to choose from: sole proprietorship, partnership, corporation and s corporations. A limited liability company (LLC) is a business structure allowed by state statue. It is important to consider the legal and tax implications of each of these structures before deciding which is best for your new business. More detailed information can be found on the IRS website.

Choosing a tax year

The next step is to determine whether or not you plan on filing your tax return on a calendar year or fiscal year. A calendar year consists of the 12 consecutive months that start on January 1 and end on December 31. A fiscal year is any 12-month period that ends on the last day of any month except December. Most small businesses file their taxes on the calendar year; however, there may be reasons to file on a fiscal year basis, such as if you will be operating a seasonal business and your season will be split due to the calendar year along with your income and expenses.

Paying self-employment taxes

Self-employed individuals are required to pay self-employment tax (SE tax) as well as income tax. SE tax is a Social Security and Medicare tax for individuals who work for themselves and have net earnings from self-employment of $400 or more. What most new business owners don’t realize is they have to pay both the employer (7.65%) and employee (7.65%) portion of Social Security and Medicare tax. Fortunately, there is a deduction for the employer-equivalent portion of the SE tax on your individual tax return.

Paying estimated tax payments

Taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments. Estimated tax payments are required quarterly to pay tax on self-employment income and to pay SE taxes. If you don’t pay enough tax each quarter, you will be charged a penalty. Individuals, including sole proprietors, partners and S corporation shareholders, generally use Form 1040-ES, to figure their federal estimated tax. Federal quarterly tax payments can be paid online. Don’t forget to pay state quarterly tax payments as well!

Starting a new small business can sometimes be an overwhelming process with many additional steps involved. It is important to seek out qualified legal and tax professionals to assist you through the process and help turn your dream into a reality.

Stacy Redmond, CPA