The thought of branching out and starting your own business can be an exciting opportunity and time for you. However, you need more than writing up a business plan. If you’re expecting to have employees, you’ll need to complete a variety of state and federal forms and applications to get your business up and running. A tax professional like Peter Scala can help! With that in mind, we’ve compiled a few tips for what you need before you start your new business.
The first thing you should decide on when starting your own business is what entity you will use. The type of business structure you ultimately choose will determine which taxes are applicable to your company and how to pay them – in addition to which income tax return you will need to file. These are the most common types of business entities:
- Limited Liability Company (LLC) – A business structure that is allowed by a state’s statute
- Sole Proprietorship – This is an unincorporated company that’s owned by one individual. There isn’t a distinction between you and your business, and any profits and losses will be factored into your personal taxes.
- Partnership – This is a business that’s ownership is between two or more people. This type of business is also unincorporated.
- Corporation – This is also known as a “C” corporation. This is a separate entity that’s owned by multiple shareholders.
- S Corporation – This is a corporation that passes any corporate income, losses, credits, and deductions to its shareholders.
Employer Identification Number (EIN)
Obtaining an Employer Identification Number (which is also known as a Federal Tax Identification Number – TIN) is the first thing you should do once you’ve decided on the type of business your company will be because many forms will require you to provide your EIN. The IRS will issue an EIN to sole proprietors, partnerships, corporations, nonprofit associations, estates, trusts, government agencies, employers, certain individuals, and other entities for tax reporting and filing purposes.
Most businesses will need an EIN, and any business with an EIN will need to keep the business location, mailing address, and any responsible parties, like shareholders, up-to-date. The IRS regulations require any business with an EIN to report changes of responsibilities and shareholders within 60 days.
The quickest way to file for an EIN when starting your own business is directly through the IRS website or by contacting them by telephone. There is no cost to apply, and you can apply for one EIN per day.
Choosing a Tax Year
When starting your own business, you’ll need to choose which tax year you want to use for tax reporting purposes. A tax year is your annual accounting period for reporting income and expenses and keeping records as backup documentation.
- Calendar year – This year is 12 consecutive months beginning on January 1 and ends on December 31.
- Fiscal year – This year is 12 consecutive months, and ends on the last day of any month you choose- except for December.
State Withholding, Sales, Unemployment, and other Business Taxes
It will take a few weeks, but once you’ve received your EIN from the IRS, you’ll need to fill out forms to establish accounts with Unemployment Insurance Registration, sales tax collections, and the state for any payroll tax withholdings. You will need to pay business taxes when starting your own business, including self-employment tax, income tax, excise tax, and employment tax. The type of tax your company will be liable for depends on the structure you’ve chosen, and you may be required to make estimated payments to the state or IRS.
Payroll Record Keeping
Since recordkeeping and payroll reporting can be costly and time-consuming, most people will outsource this service. Regardless of which entity you’ve chosen to operate your business as when starting your own business, you will most likely be required to send any payroll tax deposits to the federal government electronically. Working hand-in-hand with payroll and employer taxes, personnel files for each employee should be kept up-to-date, starting with their employment application, as well as:
- Form W-4 (Employee’s Withholding Allowance Certificate) – This form is completed by your new employee, usually when they receive all new-hire paperwork, and is used for calculating their federal income tax withholding. This form also provides you information about the employee, such as their address and Social Security number.
- Form I-9 (Employment Eligibility Verification US Citizenship and Immigration) – This form verifies that the employee is able to work legally in the United States.
If you’ve chosen to have employees when starting your own business, there may be certain requirements in regards to healthcare that you, as the business owner, will need to comply with. There is a Small Business Health Care Tax Credit available to small businesses that have fewer than 25 employees who are a combination of full-time and part-time, or just full-time, to help you pay for any health care coverage you offer to your employees. There is a maximum credit of 35% of premiums paid for tax-exempt small businesses, such as charities, and 50% for small business employers. This credit is available for two consecutive tax years for all eligible employers.
Keeping your finances organized and on track are important to your business running smoothly. For help with setting an accounting and payroll system for your new company, contact us today.