It's an exciting time when you are starting your new business. There are so many things to think about that you may forget one of the most important aspects – taxes. Before diving into the business world, take a few minutes to consider the tax aspects of your new business.
Your tax obligations are heavily influenced by the type of business structure you choose. Typical business structures include sole proprietorships, partnerships, C companies, S companies, or limited liability corporations (LLCs).
Sole proprietorships, partnerships, and LLCs are reported on personal tax returns as profits are passed on to owners. Other corporate structures require filing a corporate income tax return. Corporate structures generally protect personal accounts from corporate debt, but they vary in levels of tax reporting and complexity.
Please refer to these links provided by the IRS for details on each structure and the corresponding tax forms and duties.
If your structure is nothing more than a sole proprietorship, you will need to apply for an Employer Identification Number (EIN) which will serve as your identifier for tax purposes. Sole proprietorships can also choose to purchase an EIN to avoid having to use their social security number as an identifier. Please visit the IRS EIN website for more information.
- Income Tax – You will have to pay income tax on your business income whether the structure requires you to report it through personal tax returns or corporate tax returns.
- Labor Taxes – If your company has employees, you will have to pay various income taxes. The primary employment taxes are Social Security and Medicare taxes (usually referred to as FICA taxes on payroll as they are withheld under the Federal Insurance Contribution Act). You must pay the employer's contribution to each tax and withhold the employee's contribution. The tax of the Federal Unemployment Tax Act (FUTA) also applies. Check the business structures link above for structure-specific details.
- Taxes on self-employment – If you are self-employed, you are responsible for paying both the employer and employee components of FICA taxes on a quarterly basis.
- Excise duties – Excise taxes are special taxes that apply to a specific type of business and business activity. These include, for example, fuel taxes, environmental taxes, air transport taxes and specific manufacturer taxes. Check the resources in your industry along with the IRS website to determine what excise taxes, if any, apply to your business.
You may have to pay certain taxes gradually throughout the year, such as: B. Taxes on self-employment. Any tax that is not withheld throughout the year must be paid in quarterly installments as an estimated tax. Failure to do so may result in underpayment penalties. For more information, see IRS Publication 505, “Tax Deduction and Estimated Tax”.
After looking through all of your federal tax concerns, don't forget about your state and local obligations. Your local Chamber of Commerce should be able to assist you with state and local tax considerations, and your Treasury Department's website should provide information on business tax obligations. Be sure to ask about any changes made by recent changes in tax law that may affect your business. The IRS provides useful links to government organizations here.
Don't let unexpected tax obligations creep into your company. Take the time to do your research before you begin and outline and plan your tax obligations in advance. After that, you can fully focus on the more important aspects of building and growing your business – attracting customers and keeping them happy with your products and services.
Due to the COVID-19 pandemic, the IRS and Treasury have extended the 2021 tax filing deadline from April 15 to July 17. In the interests of safety and to contain the spread of the coronavirus, all Taxpayer Assistance Centers (TAC) and personal IRS services only work by appointment. Taxpayers can call 844-545-5640 to schedule an appointment or find their local IRS TAC here. Please visit the IRS Coronavirus Tax Relief page for the latest updates.
Failure to pay your taxes or a fine you owe can have a negative impact on your creditworthiness. You can check your credit history and read your credit report for free in minutes by signing up for MoneyTips.
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