Whether you are considering taking that leap into entrepreneurship or have recently opened the doors to a new business, it is important for you to know the tax implications of your new venture. Here are some basic tax tips to consider.
1. Type of Business Entity . Its important to decide early on what type of business you want to establish, and which will be the most beneficial to you. Some of the most common entity types are sole proprietorship, corporation, S corporation and limited liability company. Each one of these types will have different tax implications and require a different federal tax form for income reporting. For more info on this topic, check out our previous article, “Starting a New Business? What Type of Business Entity is Best For You”.
2. Tax Types . As previously mentioned above, the type of entity you select for your business will determine the type of taxes you pay. Generally you will be paying income tax, self-employment tax, employment taxes (if you hire any additional staff), excise tax or some combination of these four.
3. Record Keeping . Life is so much easier come tax time if you have kept good records throughout the year. If you are not familiar with how to keep good records, hiring an accountant or consultant to help you get started may save you a lot of money in the long run. Good records will allow you to track revenues and deductible expenses that should be reported on your tax return. Also they will allow you to better monitor your business’s progress and growth and prepare proper financial statements.
4. Employer Identification Number . Think of your employer identification number as the social security number for your business. Unless you file as a sole proprietor, you will usually be required to obtain an EIN for tax purposes. For more info on EINs check out IRS.gov .
5. Accounting Method . Finally, it is important you use a consistent accounting method, which is a set of rules that determine when to report income and expenses throughout the year. The most common are the cash and accrual methods. Under the cash method, income is reported when cash is received and expenses deducted when paid. Under the accrual method rules, income is typically reported in the year it is earned and expenses deducted in the year they are incurred (not necessarily when paid).
We are always happy to share our advice on any or all of the above topics. Starting a new business can be a huge undertaking. Life certainly becomes much easier when you start your business off on the right foot and in the right way. If you have any questions, please give us a call.