Are you forfeiting your summer vacation to start your new business? The Internal Revenue Service wants to help you take all the right steps from the beginning.
Here are some tips to make startup-related tax issues less confusing:
1. Decide on your business entity. What type of business entity are you going to establish? Be sure to think this through and research extensively. Once you choose your business structure, you can’t change it easily. The type of business you establish, whether it’s a sole proprietorship, partnership, C corporation, S corporation, or limited-liability company (LLC), will determine which tax forms you need to file.
2. Know which taxes you need to pay. The type of business you run will determine which taxes you will pay and how you will pay them. You may need to pay income tax, self-employment taxes (Social Security and Medicare for yourself), employment taxes (withholding part of Social Security and Medicare taxes from your employees’ wages and paying a matching amount), and excise taxes (taxes paid when purchases are made on a specific good, such as gasoline).
3. Get an Employer Identification Number (EIN). If you have employees or you operate your business as a corporation or partnership, you need an EIN, also called a Federal Tax Identification Number, to identify your business. You’ll need your EIN when you invoice your vendors.
4. Keep good records. Choose your record-keeping system and make a point to keep up with documenting all your business income and expenses. Depending on what type of business you have, you may be required to keep certain kinds of records. For tax purposes, hold on to all supporting documents such as bank deposit slips, cash register receipts, and more.
5. Choose calendar year or fiscal year. Every business owner must figure taxable income on an annual period called a tax year. Once you choose to go with either a calendar tax year (12 consecutive months beginning Jan. 1 and ending Dec. 31) or a fiscal year (12 consecutive months ending on the last day of any month except December), you must continue with that choice unless you get IRS approval to change.
6. Choose your accounting method. You must also decide which accounting method you will use to report income or expenses. The most common methods are cash and accrual. Under the cash method, you report income in the tax year you receive it, and you deduct expenses in the tax year you pay them. Under the accrual method, you report income in the tax year you earn it, and you deduct expenses in the tax year you incur them.
Need help deciding on a business structure when incorporating or filing an EIN? The Company Corporation® can help. Speak to an incorporation specialist by visiting The Small Business Authority’s “Incorporate Your Business” page.
The Company Corporation® furnished this article as part of a series that appears every Friday on Thesba.com. The Company Corporation® is a service company and does not provide legal or financial advice. For more information, visit Incorporate.com.