Starting a small business can have several tax implications. It’s important to be aware of these to avoid surprises and to plan effectively. Here are some key points to consider:
- Business Structure: The structure of your business (sole proprietorship, partnership, LLC, S Corporation, C Corporation) will determine how you pay taxes. For example, sole proprietors report business income and expenses on their personal tax returns (Schedule C, attached to Form 1040), while C corporations are separate tax entities and file a corporate tax return (Form 1120).
- Self-Employment Taxes: If you’re a sole proprietor, partner, or LLC member, you’ll typically have to pay self-employment taxes (Social Security and Medicare). This is usually a higher rate than what employees pay because you’re responsible for both the employee and employer portions.
- Estimated Taxes: The IRS typically requires business owners to pay estimated taxes quarterly if you expect to owe tax of $1,000 or more when your return is filed. These cover income tax and self-employment tax.
- Business Expenses: You can deduct expenses that are ordinary and necessary for your business. These might include costs for home office, equipment, supplies, business travel, professional services, advertising, and more. Keeping meticulous records of these expenses is important.
- Payroll Taxes: If you have employees, you’ll have to withhold payroll taxes from their paychecks and match certain taxes. You’ll also need to pay into unemployment insurance and workers’ compensation.
- Sales Taxes: Depending on your state and the nature of your business, you may need to collect sales tax from customers on goods and/or services and remit these to the state.
- Depreciation: If your business buys property, vehicles, or equipment, you may not be able to deduct the full cost in the year of purchase, but may have to depreciate it over several years. However, some small businesses may qualify for Section 179 deduction which allows you to deduct the full cost in the year of purchase, subject to certain limits.
- Tax Credits: There are several tax credits available to small businesses, such as the small business health care tax credit or the work opportunity tax credit. These can reduce the amount of tax you owe.
- Record Keeping: Proper record keeping is crucial for tax purposes. You’ll need to keep track of income, expenses, and specific transactions like payroll.
- Tax Year: Most businesses use the calendar year (January to December) as their tax year. But some businesses may choose to use a fiscal year (a 12 consecutive month period ending on the last day of any month except December).
This is a high-level overview, and there can be many more details to consider. Tax laws can also vary by location. It’s often a good idea to consult with a tax professional or CPA to make sure you’re not missing anything and are taking advantage of all possible deductions and credits. It’s also important to stay informed about changes in tax law, which can happen every year.