A Simple Tax Guide for New Business Owners

Starting a new small business is an exciting journey. So many steps in the process are exciting and new. Unfortunately, taxes are a necessary evil. You will want to keep Uncle Sam and the IRS from bugging you; to do that, you’ll have to endure the unpleasant filing of your business taxes.

Tax season can be draining and perplexing. In this article, we’ve put together some helpful information that you can use to help get all of your ducks in a row. Let’s go over a few basics.

Understanding the Business Tax

There are three types of business taxes, and depending on how you configure your enterprise, you will be responsible for one of these general forms.

Estimated Taxes

If you are a freelancer, independent contractor, or small business owner who will pay at least $1000 in taxes each year, you will most likely have to pay them quarterly. If you miss the due dates, you may get hit with interest and expensive penalties.

You must pay your quarterly tax estimates by the fifteenth day of April, June, September, and January.

Income Taxes

All businesses will have to file their annual income tax returns. Corporations pay taxes at one rate, and other companies, considered “pass-through,” are taxed at an individual rate.

Self-Employment

Those who are registered as self-employed will have to pay into Medicare and Social Security. If your net earnings are $400 or more, you will have to pay these taxes.

Employee taxes

On the other hand, if you have employees, you have to pay Medicare and Social Security taxes as well as federal income tax withholdings. You will also have to contribute to the federal unemployment tax.

man buying coffee on counter

What Are the Pass-through Entities?

A pass-through entity is a particular business structure that is aimed at reducing the adverse effects of double-taxation. These companies do not pay income taxes at a corporate level. The following types of organizations fall under this category.

A Sole Proprietorship

A business where you are the single owner is considered a sole-proprietorship. You are the boss, and you are responsible for what goes on. If this is the category that you fall into, you must keep your company and personal finances separate. This will help you stay out of tax trouble.

Partnership

When an entity has two or more owners, then it is considered a partnership. This can either be limited or limited liability.

Limited Liability Company (LLC)

LLCs keep business and personal assets separate, which will reduce your personal risk if your business is unable to pay its liabilities. Your profits and losses will pass through your personal income without nothing to worry about.

S Corporation

This business structure will allow for gains and losses to pass through the owners’ personal income without being subject to corporate tax rates. There are limits, and you cannot have more than 100 shareholders.

State and Local Taxes

Your new business will also be subject to different state and local taxation. Depending on where you live, the types and amount of charges will differ. A tax professional can be immensely helpful here because things can get complicated.

State Income

Some states like Delaware and Florida do not have taxes on state income. That may be why businesses love those states. If you’re located in any other part of the country, you will have to pay.

Property

If you have a brick and mortar location for your business, you will have to pay property tax. These are typically assessed at a county or local level.

Sales

Does your small company sell things? If so, you’re responsible for collecting sales tax. This can be complicated.

A Final Note

While these tips are undoubtedly useful to gain a general understanding, a professional can help you make sure that you stay out of trouble. As stated on taxpage.com, any new entrepreneur “often has little more than general awareness of the legal and tax issues involved in starting a business.” A good lawyer or accountant will make your life much more comfortable.

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