One of the keys to starting a successful business is to understand the tax implications of operating a business, and selecting the right business structure to provide the best possible tax treatment for you. Starting a business involves more than just income taxes. Depending on the type of business you’re operating, and whether or not you have employees, you may be subject to a variety of additional taxes — some of which you may have never even heard of!
To help you get started on the right foot, here are five things that you should bear in mind before you even start your business:
Business Structure. An early choice you need to make is to decide on the type of structure for your business. The most common types are sole proprietor, partnership and corporation. The type of business you choose will determine which tax forms you file, which leads us to…
Business Taxes. There are four general types of business taxes. They are income tax, self-employment tax, employment tax, and excise tax. In most cases, the types of tax your business pays depends on the type of business structure you set up. You may need to make estimated tax payments if you are operating as a sole proprietorship, which is the exact same thing as being “self-employed” or operating what you may have heard referenced as a “Schedule C business”. These terms all reference the same business structure.
There are many disadvantages to operating as a sole proprietorship. From a tax perspective, this is a more expensive way to operate. You can reduce both your tax burden and liability risk by operating through another type of entity, such as an LLC or subchapter-S corporation. The process and considerations for choosing the entity structure that is best for you is a bit more complicated than what we can cover in this short article, so be sure to contact us for assistance with this.
Employer Identification Number (EIN). You may need to get an EIN for federal tax purposes. Even if you are operating your business as a sole proprietorship, you may still need an EIN for certain reporting purposes. For example, if you have employees in your business, you will need an EIN for filing quarterly payroll tax returns. You obtain an EIN by filing IRS Form SS-4, which can be done online or via mail. Please contact our office if you would like assistance in completing this form.
Accounting Method. An accounting method is a set of rules that you use to determine when to report income and expenses. You must use a consistent method. The two that are most common are the cash and accrual methods. Under the cash method, you normally report income and deduct expenses in the year that you receive or pay them. Under the accrual method, you generally report income and deduct expenses in the year that you earn or incur them. This is true even if you get the income or pay the expense in a later year.
Most small businesses that are primarily service providers will use the cash method, which is far simpler and requires less accounting work to maintain your books. You may use the cash method up until you reach $5 million in annual revenue.
If you maintain an inventory of products for sale, then you must, unfortunately, use the accrual method of accounting. While cash accounting is straightforward and easy to understand for most people, since it’s the same method we use for our personal finances, accrual accounting has a whole new set of strange rules that govern when income and expenses are reported. If you are required to use an accrual method, it is highly suggested that you use the services of an accounting professional to help you with this, even if that’s only on a quarterly basis to review and reconcile your books.
Employee Health Care. Regardless of your feelings about the Affordable Care Act (ObamaCare), the fact of the matter is that the law is here and something we must contend with. Under this law, Applicable Large Employers (ALE) are required to provide health insurance to all eligible employees, or face tax penalties for not doing so. If you have more than 50 Full Time Equivalent (FTE) employees, then you are subject to this mandate.
If you have less than 50 full time employees, but still wish to provide health insurance to your employees, the law actually provides an incentive for you to do so. The Small Business Health Care Tax Credit helps small businesses and tax-exempt organizations pay for health care coverage they offer their employees. You’re eligible for the credit if you have fewer than 25 employees who work full-time, or a combination of full-time and part-time. The maximum credit is 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers, such as charities. For more information on your health care responsibilities as an employer, feel free to contact us for an appointment.