UUnderstanding tax responsibilities before starting a business can save you money and help you be successful. Here’s what you need to know:
1. Choose a business entity
The first decision you need to make is figuring out which business entity you will be using. The type of business structure determines what taxes you have to pay and how to pay them, as well as the tax return you file. The most common types of business entities are:
- Sole Proprietorship – An unincorporated business owned by an individual. There is no distinction between the taxpayer and his business.
- Partnership – An unincorporated business whose ownership is shared between two or more people.
- Company – Also known as Company C. It is a separate entity owned by shareholders.
- S Corporation – A corporation that elects to transfer the corporation’s income, losses, deductions, and credits to shareholders.
- Limited Liability Company – A business structure authorized by state law.
2. Obtaining an employer identification number
Getting an employer identification number (also known as a federal tax identification number) is the first thing you need to do, as many other forms require it. The IRS issues EINs to employers, sole proprietors, corporations, partnerships, nonprofits, trusts, estates, government agencies, certain people, and other business entities for the purposes of declaration and income tax return.
An EIN is used to identify a business. Most businesses require one of these numbers. A business with an EIN must keep the mailing address, location, and responsible party up to date. IRS regulations require EIN holders to report responsible party changes within 60 days. To do this, they complete Form 8822-B, Change of Address or Responsible Party and mail it to the address on the form.
Even if you already have an EIN as a sole proprietor, for example, if you are starting a new business with a different business entity, you will need to apply for a new EIN.
The fastest way to apply for an EIN is online through the IRS website or over the phone. Applying by fax and mail usually takes one to two weeks, and you can apply for one EIN per day. There is no charge to apply.
3. Choose a tax year
A tax year is defined as an annual accounting period for keeping records and reporting income and expenses. A new business owner should choose the calendar year or fiscal year defined as follows:
Calendar year: 12 consecutive months starting January 1 and ending December 31.
Fiscal year: 12 consecutive months ending on the last day of any month except December.
4. Understand withholding taxes, unemployment, sales and other business taxes
Once you have your EIN, you need to complete forms to set up an account with the state for withholding payroll tax, registering for unemployment insurance, and collecting sales tax ( if applicable). Business taxes include income tax, self-employment tax, employment tax and excise tax. Generally, the type of tax your business pays depends on the type of business structure. Keep in mind that you may also need to make estimated tax payments.
5. Keeping of payroll records
Payroll reporting and record keeping can be time consuming and expensive. Also, keep in mind that almost all employers are required to electronically file federal payroll tax installments. Personnel records should be kept for each employee and include an employee’s job application as well as the following:
- Form W-4, Employee Payroll Deduction Allowance Certificate. Completed by the employee and used to calculate their federal income tax withholding. This form also includes the necessary information such as the employee’s address and social security number.
- Form I-9, Verification of Employment Eligibility United States Citizenship and Immigration Services. This form verifies that an employee is legally authorized to work in the United States
6. Employee health care requirements
As an employer, you should be aware of the Small Business Health Care Tax Credit, which helps small businesses pay for the health care coverage they provide to their employees. The maximum credit is 50 percent of premiums paid for small business employers and 35 percent for small, tax-exempt employers, such as charities. It is available to eligible employers for two consecutive tax years.
Norm Grill is the Managing Partner of Grill & Partners LLC (www.GRILL1.com), chartered accountants and consultants to private companies and high net worth individuals, with offices in Fairfield and Darien, 203-254-3880.