If you’re considering starting a small business, there’s a lot you’ll need to learn. One of the most important categories to make sure you’re properly educated in is how taxes work for a small business. The IRS has an extensive page that attempts to answer any questions you may have regarding taxes for a small business, but there are also many other guides out there.
Know what costs are deductible
Some people don’t realize that they can deduct a lot of what they spend for their business. It’s vital that you keep track of all receipts associated with the business, which includes any purchases you make with your own money or with a business credit card. Remember you can write of supplies and equipment, along with necessary costs, such as office space rent. Knowing all of these categories and what falls into them is important because if you report something incorrectly, you may not receive your deduction or money return. It’s also important to keep receipts so you can provide proof of purchase. Understand the basics of income taxes for your small business.
Be aware of self-employment tax
If this business is the first time you’ve been self-employed, you’re likely unfamiliar with this tax. Self-employment tax is paid by people who don’t have employers that tax their paychecks. You’ll have to pay your own tax, plus half of what’s typical for an employer. A way to relieve part of this burden is to remember that you can deduct the employer portion of the tax, which takes some of the strain off of you.
Write-off startup expenses
People who are creating their own small business are often unaware or forget that they can write-off expenses created during the first year of their startup. Many people only begin taking deductibles for their business after it’s been established and is making a profit, but you can actually begin writing off expenses during the startup phase.
Remember quarterly estimated payments
Small business are required to make quarterly estimated tax payments throughout the year, which turns taxes into a year-long occurrence instead of only an annual concern. This fact is why it’s important to stay on top of your spending and what purchases are being made for your business. If you don’t submit at least 90% of your taxes, you may be subject to penalties that can severely impact your tax plan. Luckily, startups are excused from these payments for the first year.
Pick the right legal entity
It’s not common knowledge, but the legal entity you choose can have a huge impact on your tax liability down the road. There are lots of options for you to choose from, such as LLCs, S corporations, and sole proprietorships. All of them have some great benefits, but also drawbacks, so it’s important to do sufficient research in order to determine which one is best for your business.
Investopedia also has a great guide to starting a small business and what information you need to know.