Are you planning on starting a business? Maybe you’ve recently retired from your career but don’t want to hang up the towel yet. Perhaps you are unhappy with your current job and want to work for yourself. Or maybe you have a hobby that has turned into a business. There are some important things you’ll need to know about taxes, entity types, how to account for your income/taxes, and more.
Type of Business:
What type of business entity are you going to establish? A business can be a sole proprietorship, partnership, C corporation, S corporation, or limited liability company. The type of business you establish determines which tax forms you will need to file. There are pros and cons to each type (minimum tax, liability protection, etc) so you should talk with a professional about which entity type you should form.
Types of Taxes:
The type of business you operate also determines what types of taxes you will pay and how you will pay them. Typical taxes include income tax, sales tax, and payroll tax.. Depending on your entity, you may have a minimum tax due even if your business is not profitable. Once an employee is hired, payroll taxes always need to be remitted.
Identification Numbers:
A business typically needs to get an Employer Identification Number to use as an identifier for federal tax purposes. As a sole proprietor, you can use your social security number, but I usually recommend applying for an EIN even if it isn’t needed to prevent you from having to give this information out to customers who will issue a 1099 form to you. If you hire employees, you will also need a state identification number. If you remit sales tax, an account to file/pay collected sales tax will also need to be established.
Recordkeeping:
Good records will help you keep track of deductible expenses and help your CPA prepare the tax returns. Proper bookkeeping will also help you monitor the financial success of your business and allow you to prepare financial statements.
Tax Year:
Every business taxpayer must figure taxable income on an annual basis called a tax year. Your tax year can be either a calendar or fiscal year. Most businesses prefer calendar years, but fiscal years can start in any month of the year. Keep in mind the due date of your tax return is dependent upon the end of your tax year. Therefore, if you have a fiscal year that closes in any month other than December, your tax due date is not the typical March for corporations or April for proprietorships. Failure to file returns on time can lead to penalties and interest if taxes were due.
If there is anything you are unsure about when stating your business, speak with a professional who can assist you with these tasks.