Understanding your tax obligation is one key to business success. When you start a business, you need to know about income taxes, payroll taxes and much more. Here are some IRS tax tips that can help you get your business off to a good start:
Business Structure. An early choice you need to make is to decide on the type of structure for your business. The most common types are sole proprietor, partnership and corporation. The type of business you choose will determine which tax forms you file.
Business Taxes. There are four general types of business taxes. They are income tax, self-employment tax, employment tax and excise tax. In most cases, the types of tax your business pays depends on the type of business structure you set up. You may need to make estimated tax payments. If you do, you can use IRS Direct Pay to make them. It’s the fast, easy and secure way to pay from your checking or savings account.
Employer Identification Number (EIN). You may need to get an EIN for federal tax purposes. Search “do you need an EIN” on IRS.gov to find out if you need this number.
Accounting Method. An accounting method is a set of rules that you use to determine when to report income and expenses. You must use a consistent method. The two that are most common are the cash and accrual methods. Under the cash method, you normally report income and deduct expenses in the year that you receive or pay them. Under the accrual method, you generally report income and deduct expenses in the year that you earn or incur them. This is true even if you get the income or pay the expense in a later year.
Do not comingle your personal account with your business checking account. Make all your business income, including cash receipts, in the business checking account. Also pay all your bills by checks and/or your business checking account debit card. Make sure you keep all receipts for any payments made with cash.
It is also very important to have some type of bookkeeping/software program for your business. As a business owner, you need to keep track of your income and expenses to monitor your profitability.
Remember, you must give an independent contractor Form 1099-Misc by January 31st of the following tax year. This rule applies if the total amount you pay them is $600 and more.
Get all the basics of starting a business on IRS.gov at the Small Business and Self-Employed Tax Center. If you are delinquent in your filings, make sure you contact a professional to help you get compliant. Remember, for every tax problem, there’s a solution.
Constant W. Watson III, CPA, CTRS, is both a Certified Public Accountant and one of only ten Certified Tax Resolution Specialists in the State of Illinois certified by the ASTPS. Watson has more than 30 years of income tax and accounting experience. You can hear his radio program, “Watson On Taxes,” every Saturday morning at 10 a.m. by tuning in to AM 1390. For more information, visit WatsonOnTaxes.com or call (708) 206-9900.