Important Tax Tips for New Business Owners
As a new business owner, you have a lot on your plate, and the last thing you need is to be unpleasantly surprised when tax season rolls around. Planning for next tax season now will allow you to make the most of your entrepreneurial endeavors and provide some peace of mind.
Here are some tax tips you should know when starting a new business:
- Choose the right business entity. When it comes to starting a business, you have options regarding the type of business you choose to operate and file taxes as. Choosing the right entity type is important because it has a huge impact on how your business income is taxed. Not only will this decision have an impact on how much your taxes are paid (by the business or by you personally), it will affect the amount of paperwork your business is required to do, the personal liability you face, and your ability to raise money. The most popular business-structure options are sole proprietorships, partnerships, limited liability companies (or LLCs), S corporations, and C corporations. It is important to do extensive research on what each of these represents, and we highly recommend seeking expert advice. You can learn more about each of these business entity structures here.
- Choose an accounting method. Even if your business is completely digital, you will still need to establish a way to keep records of your income and expenses. There are several accounting methods, but the main two are cash basis and accrual basis. The cash method is typical with individuals and small businesses because it is a little more straightforward. With this method you would account for income at the time it is received, and expenses at the time they are paid. The accrual method is a bit different, in that you would account for income at the time it is earned. For example, if you are a freelance computer programmer and you finish a job in December 2019 but don’t get paid until January 2020, you would still report that income on your 2019 tax return. The same goes for expenses.
- Educate yourself on self-employment taxes. You could be susceptible to self-employment taxes depending on the way you structure your business. Self-employment tax consists of Social Security and Medicare taxes – and requires the self-employed individual to pay both the employer and employee’s share of the tax. It is important to consider how much income the business is generating; and if that income will be flowing through to your personal return you’ll want to keep the SE tax in mind. You can learn more about self-employment taxes here.
- Know what tax breaks to take advantage of. The tax code provides a variety of tax credits for businesses. Given you qualify, you might be able to take advantage of some the first time you file taxes as a new business. You can find a full breakdown of business tax credits on the IRS website.
Filing your taxes can get complicated when starting a new business, so it is important to get started sooner rather than later. The licensed accountants at Taurus CPA Solutions can help guide you in the right direction. We can assist in areas such as accounting and bookkeeping, business consulting, CFO financial services, and more. Visit our services page to learn more.