Tax Lingo For New Small Business Owners: 9 Terms You Should Know
Jargon and unfamiliar terms can make tax paperwork sound like a language you don’t speak. Don’t let all of this tax-specific vocabulary overwhelm you. We’re here to help you understand the lingo. Here are nine terms that frequently cross the desks of new small business owners.
Taxes are mandatory obligations, but figuring out how to navigate all the ins and outs of state, local, and federal regulations can be complicated, especially when you’re bogged down by tax terminology. Some buzzwords may sound somewhat familiar, but navigating what they mean and how they might affect your business can be tricky.
When you’re starting your own business, the last thing you need is your entrepreneurial dreams being interrupted by a glitch in your tax filings or practices. Understanding these and other business tax terms can be your first step in maintaining less-stress tax compliance.
#1 - Foreign
When using this term, context is key. Generally, it means “from outside,” so, at the federal level, we tend to correctly associate it with foreign countries or an international business. However, at the state level, this can be applied from a different aspect. Your state may have specific language around foreign and domestic companies, LLCs, and/or other entities. You’re not alone if your first thought is, “well, I’m a domestic company:” I live in the state, my business is located here, and I’m a U.S. Citizen. But as mentioned, the state considers other factors.
Here is how you can tell for sure: Check where your business was formed or incorporated. Keeping with the origin “from outside:” businesses can be “foreign” to a state, regardless of their operating location or where their employees live, if they were incorporated/formed outside the state in question. For example, a company located and doing business in California, but incorporated in Delaware, would be a domestic company to Delaware and a foreign company to California and any other state they operate in.
#2 - EIN
An employer identification number (EIN) is the number the IRS gives you to identify your business. It’s equivalent to an individual’s social security number. You may hear this referred to as a tax ID or tax registration number. But officially, it’s your EIN.
Remember, you may also be subject to state taxes, if so, you will have state tax IDs for various tax types as well.
#3 - Entity
One of the first steps in starting your business is applying for your EIN, and as part of that process, the IRS wants to know your legal structure. The legal structure or “entity” will determine how you operate your business in matters such as taxation and financial/legal liability. The most common entities are a sole proprietor, LLC, partnership, C corporation, and S corporation.
#4 - Independent Contractor
If you’re a business owner, are you an independent contractor (IC)? According to the IRS, you’re probably an independent contractor if the person or business paying you only has the right to control or direct the final result of your work, not the means or method you use to complete it.
Here is a way to think about this: While all ICs are self-employed, not all self-employed individuals are ICs. Moreso, independent contractors receive a 1099 form from their clients when they complete work for a company but are not considered an employee. That said, an IC is responsible for remitting all applicable taxes associated with income.
#5 - Income
When discussing your business’s finances, the topic of gross income will probably come up. Of course, you’ll need to know your gross income for tax purposes, but you’ll probably also be asked to provide it when applying for a business loan or renting commercial space for your business. There are some important distinctions you should know.
- Gross income: Simply put, gross income is ALL income from ALL sources. It includes wages, business income, dividends, capital gains—everything.
- Adjusted gross income: Adjusted gross income (AGI) is gross income minus some adjustments. AGI determines what and how much of a deduction you are eligible for.
- Taxable income: AGI less credits and deductions, your tax liability is determined from this number
#6 - Assets/Liabilities
In the simplest terms, an asset is something you own, and a liability is something you owe. Assets are classified as current or fixed, and liabilities are classified as current or long-term.
Current assets are items that can be quickly turned into cash, usually within a year. Fixed assets are items that add value to a company and last longer than a year. Examples of fixed assets are computer equipment and furniture & fixtures.
Current liabilities are things that need to be paid within a year. Long-term liabilities are obligations that will be paid back in terms that will last longer than a year, such as vehicle financing or the mortgage on an office building.
#7 - Estimated Tax Payments
The IRS says estimated tax is the method used to pay tax on income that is not subject to withholding. That means small business owners who are self-employed and don’t have an employer to withhold taxes from their paycheck must remit their taxes directly to the IRS if they expect to owe $1,000 or more in tax for the tax year. Estimated tax payments must be remitted every quarter. It’s important to note due dates vary by the business entity.
#8 - Tax Year
A tax year refers to a period of time, usually 12 consecutive months. Additionally, there are two types of tax years: calendar and fiscal.
- A calendar year begins on January 1st and ends on December 31st of that year.
- A fiscal year ends on the last day of any month other than December. For instance, some businesses have a fiscal year that begins July 1st and ends June 30th of the following year.
Most small businesses use a calendar year for their taxes. In fact, according to the IRS, if you don’t keep books, have no annual accounting period, or follow a year that doesn’t qualify as a fiscal year, you’re required to adopt the calendar year.
The IRS has additional provisions and requirements in Internal Revenue Code or Income Tax Regulations that may also require you to use the calendar year, so check the IRS instructions for Form 1128 to learn more about adopting, changing, or retaining a tax year.
#9 - Power of Attorney
A power of attorney (POA) is a legal document that gives someone else power or authority to make decisions on your behalf. POAs can be very limited, existing only for a specific area and designated time. Others are general and can remain in place indefinitely.
For example, a POA may allow someone acting on behalf of your business to take limited actions that keep your business up and running, such as selling securities, accessing financial accounts, placing orders, or making payments. However, this same POA may not give the designated person the authority to hire or fire employees or the ability to access all accounts.
A business owner should understand the scope and duration of any POAs issued. They are a helpful tool to let others assist you while you focus on running your business. But stay business savvy—make sure you always know who has access and control of your finances and on what terms.
Learn to speak business tax
Reading tax paperwork doesn’t have to be stressful. Learning how to navigate all those filings begins with learning the jargon. Understanding these fundamental concepts builds a foundation for managing your business tax. You can learn more by checking out our webinar, 9 Tax Things New Small Business Owners Need to Know.
ComplYant helps small businesses manage their taxes. You can start today by signing up for a free account and getting reminders from custom calendars. You’ll never miss a tax or business filing deadline.