It is an exciting time when you start your new business. You have so many things to think of that you may forget one of the most important aspects — taxes. Before you dive into the business world, take a few minutes to consider the tax aspects of your new business.
Your tax obligations are strongly affected by the type of business structure you choose. Typical business structures include sole proprietorships, partnerships, C Corporations, S Corporations, or Limited Liability Corporations (LLCs).
Sole proprietorships, partnerships, and LLCs are reported using personal tax returns because profits are passed through to the owners. Other corporate structures require filing a corporate tax return. Corporate structures generally shield personal accounts from business debt but come with varying levels of tax reporting and complexity.
For details on each structure and the proper corresponding tax forms and obligations, check these IRS-provided links.
If your structure is anything other than a sole proprietorship, you will need to apply for an Employer Identification Number (EIN) that serves as your identifier for tax purposes. Sole proprietors may also choose to acquire an EIN to avoid having to use their Social Security Number as an identifier. See the IRS EIN webpage for assistance.
- Income Tax – You must pay income tax on your business earnings, whether the structure requires that you report them through personal tax returns or corporate tax returns.
- Employment Taxes – If your business has employees, you will have various employment taxes to pay. The primary employment taxes are Social Security and Medicare taxes (typically known as FICA taxes on pay stubs because they are required to be withheld under the Federal Insurance Contributions Act). You must pay the employer's contribution to each tax and withhold the employee's contribution. The Federal Unemployment Tax Act (FUTA) tax also applies. Check the business structures link above for structure-specific details.
- Self-Employment Taxes – If you are self-employed, you are responsible for paying both the employer and the employee components of the FICA taxes on a quarterly basis.
- Excise Taxes – Excise taxes are special taxes that relate to a particular type of business and business activity. They include such things as fuel taxes, environmental taxes, air transportation taxes, and specific manufacturer's taxes. Check resources within your industry along with the IRS website to determine what, if any, excise taxes apply to your business.
You may need to pay certain taxes in increments throughout the year, such as self-employment taxes. Any tax that is not subject to withholding throughout the year must be paid in quarterly installments as an estimated tax. Failure to do so can result in underpayment penalties. See IRS Publication 505, "Tax Withholding and Estimated Tax," for details.
After working through all your federal tax concerns, do not forget about your state and local obligations. Your local Chamber of Commerce should be able to help you with state and local tax considerations, and the website for your State Department of Revenue should contain information on business tax obligations. Be sure to ask about any changes introduced by recent tax law changes that may affect your business. The IRS offers useful links to state organizations here.
Don't let unexpected tax obligations sneak up on your business. Take the time to do your research before you begin, and outline and schedule your tax obligations up front. After this, you can fully concentrate on the more important aspects of establishing and growing your business — attracting customers and keeping them satisfied with your products and services.
The IRS and Treasury Department have extended the 2021 tax filing deadline from April 15 to May 17July 15, due to the COVID-19 pandemic. In the interest of safety and to curb the spread of the coronavirus, all Taxpayer Assistance Centers (TAC) and face-to-face IRS services operate by appointment only. Taxpayers can call 844-545-5640 to schedule an appointment or find your local IRS TAC here. See the IRS Coronavirus Tax Relief page for the latest updates.
Failing to pay your taxes or a penalty you owe could negatively impact your credit score. You can check your credit score and read your credit report for free within minutes by joining MoneyTips.
Originally Posted at: https://www.moneytips.com/do-not-let-taxes-kill-your-new-business
This article originally ran on moneytips.com.