If you plan to start a new business it is important for you to know your federal tax responsibilities. Here are five very basic tips that can help you get started.
Type of Business. Early on, you will need to decide the type of business you are going to establish. The most common types are sole proprietorship, partnership, corporation, S corporation and Limited Liability Company. Each type reports its business activity on a different federal tax form.
Types of Taxes. The type of business you run usually determines the type of taxes you pay. The four general types of business taxes are income tax, self-employment tax, employment (i.e. payroll) tax and excise tax.
Employer Identification Number. A business often needs to get a federal EIN for tax purposes. Even if you are operating as a sole proprietorship, reporting your income under your social security number on Schedule C of the 1040, you will need an EIN if you have employees.
Recordkeeping. Keeping good records will help you when it’s time to file your business tax forms at the end of the year. They help track deductible expenses and support all the items you report on your tax return. Good records will also help you monitor your business’ progress and prepare your financial statements. You may choose any recordkeeping system that clearly shows your income and expenses.
Accounting Method. Each taxpayer must also use a consistent accounting method, which is a set of rules that determine when to report income and expenses. The most common are the cash method and accrual method. Under the cash method, you normally report income in the year you receive it and deduct expenses in the year you pay them. Under the accrual method, you generally report income in the year you earn it and deduct expenses in the year you incur them. This is true even if you do not actually receive the income or pay the expenses until the next fiscal year.
IRS Circular 230 Disclosure
Pursuant to IRS Regulations, we inform you that any tax advice provided or implied on this post (including attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed on the taxpayer.
While the information contained in this post is believed to be reliable, we cannot guarantee its accuracy or completeness.