Owning your own business is no small task. We have created a list of five tips that neatly encapsulate elements of the tax code that you should keep in mind when putting together a business plan. If you are a business owner or are considering it, you should research the tax obligation that comes with the ownership of a company. It takes determination, planning and foresight to build a company that will stand the test of time.
1. What type of business will it be?
The type of business that you build will determine which tax form you will need to file. There are three broad categories of business, each with their own rules:
- Sole Proprietor: This is a business owned by one person. The company’s financials can conveniently be included on the proprietor’s personal tax form.
- Partnership: This is a business owned by two or more people. The company profits or losses in this case “pass through” the company to the partners, who each include their share in their personal return. Additionally, the company itself will need to file Form 1065 and Schedule K-1 to inform the IRS of each partner’s share.
- Corporation: A corporation has its own income tax return, filing Form 1120. There are two types of corporations, C and S, and the rules are different for each.
2. Be aware of applicable business taxes
There are 4 taxes that may or may not apply to your business, depending on structural elements such as what you sell, or whether or not you have employees:
- Income tax: Based on how much money the business earns in a year
- Self-employment tax: Income earned by someone in their own employ
- Employment/payroll tax: Income earned by employees on your payroll
- Sales tax: Tax applied to physical goods sold
3. Get an Employer Identification Number
The Employer Identification Number (EIN) is essentially the business version of a Social Security number. It is used to identify the business when paying federal taxes. This can easily be applied for online, so do not delay!
4. Decide on which accounting method you will follow
It is important to have a consistent way of keeping track of your business’s income and expenses. The method you choose will determine when and how you report them to the government.
- The cash method: You will report income and deductions the year you receive or pay them
- The accrual method: You will report income and deductions the year you earn or incur them
The difference is subtle, but important. Make sure to stick with the same method to avoid confusion.
5. Health care for your employees
One of the most important aspects of a business is your employees’ health care coverage. Depending on the size of your business, you may be eligible for the Small Business Health Care Tax Credit, which could cover up to 50% of premiums if you have less than 25 full-time employees.
Running a business is hard work, and accounting is among the most confusing and time-consuming tasks. Fortunately, you do not have to go it alone. Contact Klein Hall CPAs today for a free consultation on how we can help your business start off on the right foot.