Starting a new summer business? Before you do anything else, you need to read up on your tax obligations. Nothing will ruin your Small Business' chances of survival more than an IRS issue. Here's the first steps a budding entrepreneur should take to avoid tax mishaps.
Step 1: Determine your Business Type
The type of business you choose will determine which tax forms you use. The five most common business types include:
- Sole Proprietorship
- S Corporation
Step 2: Determine Your Business Tax Type
The type of business chosen also determines the taxes you'll encounter and how you'll pay them. Four general types of business tax are:
- income tax
- self-employment tax
- employment tax
- excise tax
Step 3: Get your ID Number
An EIN or Employer Identification Number is used to identify your business. You can apply for an EIN online on the IRS website.
Step 4: Keep Records
With few exceptions, the law does not require you to keep records for your business. This might be a calculated move on the IRS's part, because keeping accurate records is an almost guaranteed method for preventing IRS issues later in your operation! Records you need to keep vary from business type to business type, but some universal things to keep track of include:
- All expenses
- All receipts
- All income
- All invoices
You can keep records manually, with excel, or with accounting programs. Consider hiring an accountant if this all seems intimidating.
Step 5: Calendar or Fiscal Year
Every business taxpayer must figure their taxable income every "Tax Year," which is the annual accounting period of a business. The calendar year and the fiscal year are the most common tax years used.
- Calendar year
- Fiscal year
Step 6: Choose your Accounting Method
As a business you are required to report income and expenses to the IRS throughout the year. You have to choose a consistent accounting method for doing this. The two most commonly used methods are:
-Cash Method: you generally report income in the tax year you receive it and deduct expenses in the tax year you pay them.
-Accrual Method: you generally report income in the tax year you earn it and deduct expenses in the tax year you incur them.
The IRS does not require any courses on running a small businesses. You don't need to know anything about your tax obligations before you receive your Employer Identification Number. This is why so many small businesses are in huge trouble with the IRS. Use the Resources below to educate yourself and prevent problems before they happen.
Tax Resources for Small Businesses:
The A to Z Index for Business- Just like the title suggests, covers a variety of subjects relating to the IRS and Business.
The IRS Small Business Resources Guide, 2009 This guide covers everything, from starting up, to preparing Tax Returns.
Tax Changes for Businesses - Stay up-to-date on the various Small Business Changes with news directly from the IRS.
Economic Stimulus Payment Info Center for Business- Find information on the business provisions of the economic stimulus payments.
Get the 2009 Business Tax Calendar- This Calendar will help you make quarterly payroll payments and other important deposits on time.
E-File for Business and Self-Employed Taxpayers- This is for helping you find the E-filing option to suit your business needs.
State Taxes- Business tax required by the federal government are tough enough. But you also need to know about you State Tax obligations. This source provides access to key resources that will help you learn about your state tax obligations.
Specific Questions? And if none of the resources help, I'm always available to answer any specific questions you may have. Send me an e-mail at firstname.lastname@example.org