Starting a business may bring about a certain degree of fear and anxiety. It does not always portray a bed of roses, but you should understand that taxes related to your business plan should not hinder you from starting that small business you dream of. This fear of the unknown can be addressed with a little knowledge such as what this article offers.
This does not mean starting and running your own small business will be a piece of cake. If it were, there should have been more self-employed than employees. If you understand how taxes work, you will gain more sources of income and the privilege to be your own boss through your simple enterprise. Learn more to find out the real deal of getting into the business world.
Understand the Requirements
Starting up your own business demands a certain level of administrative tasks on your end. These, among others, include quarterly estimated taxes, keeping records, paying taxes, and filing a tax return. The list does not seem so encouraging, but you’ll get used to it once you’re in. There are also several other responsibilities which can help you land the business arena with grace. You need to decide which business structure to operate on, have an Employer Identification Number, and deduct some taxes.
Decide Which Business Structure to Adapt
It may sound too technical, but a business structure involves the way you determine your responsibilities, the means to finance your business, the method how you earn and the way to calculate your taxes. The following are the four basic classifications of business structures: LLCs, corporations, partnerships, and sole proprietorships.
The LLCs have owners or members that are secured from liabilities similar to a limited partnership structure or a corporation. IRS actually considers LLCs as similar to partnership, corporation, sole proprietorship and should be taxed as such. LLCs with a single member will be considered as a sole proprietorship, while multiple-member LLCs will be taxed as a partnership or a corporation. LLCs options vary from state to state. When you want to consider this business structure, better to do some research and ask pertinent advice.
Corporations come in two kinds: C corporations and S corporations. The owners of a corporation are shareholders. Corporations enjoy the benefit of a limited liability. If a business run by a corporation has a debt, the shareholders are not obliged to pay the debt. Personal assets of shareholders are secured under the corporation structure.
The difference between the two types of a corporation is that an S corporation is somewhat similar to a partnership, while a C corporation gets taxed twice – at the corporate level and also at the shareholder levels. But are there many C corporations out there? It is because an S-corporation is only limited to 100 shareholders and requires it to be only US-based. There are other similarities, but such discussion goes beyond this topic.
Two or more people running a business is usually under the partnership structure. Both parties share in profits, losses, and contributions. It might be wise to consider that a partnership is a kind of pass-through entity. Meaning, the income or loss of the partnership have to “pass through” the business and no tax will be imposed until the tax gets to the partner’s tax returns. The partnership is still accountable to file a business return. Only, it is merely a means to acknowledge profit and loss. The actual taxes are passed into the partner owners.
If you are the only owner of your small business, you may consider is as under a sole proprietorship structure. You will be responsible for reporting your net income, or your loss, by filing a Schedule C on your individual tax return. You will also have to pay a self-employment tax but you can get half of its amount as a deduction on your 1040 return.
Whatever business structure you choose, the best thing to do is study and choose wisely which structure fits your time, place, and capacities well.
Get an EIN
Once you’ve decided the best business structure ideal for your business plan, it’s now time to get an EIN or Employer Identification Number. The fancy name simply refers to the number that lets IRS identify you as a business taxpayer.
You can get your EIN for free and its procedure is easy to follow. You first need a valid Taxpayer Identification Number (your SSN). You also need to provide your business information and be sure to complete the EIN application in one sitting since you cannot have it saved for completion at a later time. The process can be done online so you don’t have to stress yourself a lot about it.
Know Your Tax Deductions
The beauty of owning a small enterprise is you get to deduct various expenses as being a self-employed individual. You may deduct some federal, local, state, and foreign taxes which are directly linked to your business. A full list can be derived from the IRS website, but the list includes other taxes such as personal property taxes, real estate taxes, and even half of your self-employment taxes.
Aside from these, you get to enjoy other credits and benefits available through the tax guide.
Once you start stepping into the business world, brace yourself to face challenges that may require you to overcome again and again. When it comes business-related taxes, you don’t have to stress yourself out because there are plenty of resources and assistance available to help you understand better and deal with your tax liabilities well.