Beginner's guide to business tax
Don’t leave taxes as a year-end afterthought. Business tax can be complicated, but you can make it less daunting by setting yourself up for success early. By breaking down these procedures and obligations into some fundamentals, you can build a solid foundation for how your business will manage taxes.
A business often starts with an idea. Maybe you see an opportunity to innovate an existing product. You might be inspired to take your love of crafting to new entrepreneurial heights. But after you decide to take your wood whittling from a hobby to a business, there can be major tax implications.
Launching a business today often means creating the perfect branding for your business. This is in addition to producing your product or providing your service. You need more than the perfect cookie recipe your future customers will crave. You’ll also want a memorable logo and packaging, so they’ll remember the name of the treat they enjoyed. It also wouldn’t hurt to have solid marketing so they visit your bakery in the first place.
Unfortunately, many business owners wait until after this to think about taxes. However, taxes wait for no one. The IRS expects reporting from businesses big and small. All of them have to file, those that turn a profit and those that don’t. Deadlines, filings, estimated payments, and regulations can be challenging, but procrastination never helps. As soon as possible, begin tracking and managing taxes and business filings, so you never miss a deadline. Starting early can help you set your business up for success in tax management.
What and when
Knowing your business’s structure and tax calendar is a vital first step. Managing tax deadlines and understanding the regulations begins with knowing what applies to your business. This can vary depending on the structure and calendar you choose.
About 70% of all small businesses in the US are sole proprietorships. Other common entity types include limited liability companies (LLCs), partnerships, C corporations, and S corporations. However, when considering your federal taxes, know that the IRS doesn’t recognize an LLC. Instead, according to the IRS, it can be treated as “a corporation, partnership, or as part of the LLC’s owner’s tax return (a “disregarded entity”).”
Choosing a tax year offers few options, but it still significantly impacts how you’ll handle taxes for your business. Most small businesses choose to run their tax year as the calendar year. However, some choose to use a fiscal tax year. This works for a business that uses a 12-month accounting cycle that doesn’t begin in January. For your first year in business, you’ll probably have to file for a short tax year for cycles that don’t include a full 12 months. The IRS has several rules businesses must follow in choosing, filing, and potentially changing their tax year.
| Don’t leave taxes as a year-end afterthought. Business tax can be complicated, but you can make it less daunting by setting yourself up for success early.
Records to keep
You'll need good bookkeeping to track the overall cash flow of your business throughout the year. You'll need to account for the movement of money and identification documents. Ideally, at least for a few years, you’ll keep some tangible proof of these expenses and documents. For older records, a scanned or digital copy will often suffice.
- Identifying documentation: These are the records you’ll probably need to show the IRS to identify you or your business. Examples could include a legal name, an Employer Identification Number, and business licenses.
- Accounting records: These records help you prove the broader financial state of your business. They should include any interaction you’ve had with the IRS in the past few years. Examples include past tax returns, quarterly tax filings, and statements from your bank and credit card companies.
- Expense receipts: Keep itemized lists with your accounting system to maintain your business expense receipts. Hold on to receipts if you purchase office supplies or furniture or make a charitable donation. Keep invoices from any business-related bills for services like marketing.
Function of forms
You’ll also need to track down several forms for your taxes. The paperwork you need will depend on the structure of your business and whether you have employees or partners. For example, Schedule K-1 is relevant to partnerships and some corporations. The 1095 form can apply to sole proprietors looking to take a premium credit for a qualified health plan. The IRS maintains guides to help small business owners track down relevant forms: sole proprietorships, partnerships, C corporations, and S corporations.
You’ll have to follow the procedures for reporting, paying, and filing in each state where you do business. Some states have no income tax, and others have no sales tax. You’ll also check with your state authority to see if you are responsible for other tax liabilities. Remember to check with local jurisdictions to ensure you remain compliant.
Prepare and pay
Your business could be liable to pay different types of taxes depending on different factors. Most small businesses will pay income tax, at least at the federal level. Other tax types, like excise and sales tax, can vary by circumstance.
You’ll need to check with your local tax authority to see what specific obligations will apply to your business. You may be required to make estimated tax payments every quarter. Keeping these reporting and payment deadlines is vital to avoid fees and penalties.
Of course, you’ll also be responsible for filing your annual tax return at year-end. Once you’ve done this, you’ll need to keep solid records. In fact, according to the IRS, it’s best to hold on to important documents for at least three years. To be on the safe side, some experts recommend storing scanned copies for seven years to reduce clutter and remain prepared. Examples include deposit information, payroll records, all tax filings, and previous tax returns.
After you’ve set up your business and completed your first tax year, it’s essential to maintain best practices going forward. Find a system for bookkeeping and recordkeeping that works for you and your business, and be consistent. It’s also crucial that you stay up to date with deadlines with resources like ComplYant and keep an eye on local regulations, as they can change from time to time.
Business tax is complex, but don’t let it create tax anxiety. Instead, check out ComplYant’s full array of resources, including webinars, blogs, and a platform that combines multiple tax management tools into one convenient dashboard. Sign up for a free account now.