With everything else you need to do to start a small business, dealing with taxes can seem overwhelming. Even so, it’s important to make wise tax decisions from your first days starting a business as you might not be able to change them later. You also should educate yourself on what the Internal Revenue Service (IRS) expects from you in terms of self-employment and payroll tax, as well as sales tax requirements from your state government. Below are three tax tips to help make this process easier.
Determine the Correct Company Status
If you have employees, you will need to choose whether your business is a corporation or a limited liability company (LLC). If you select the first option, you must make the additional choice of whether to pay the company’s taxes as an S or a C corporation. An S corporation passes all company income, credits, deductions, and losses along to stockholders for taxation purposes. The stockholders then report income and losses on their personal tax returns to avoid double taxation.
Typically, C corporations pay tax to the IRS independent of the company owners. Most companies that operate on a for-profit basis are C corporations unless its CEO files the required paperwork to register as an S corporation. An LLC also limits tax liability for its owners and offers the same flow-through form of taxation. Since many criteria help to determine which status is most beneficial, consider meeting with a small business accountant to ensure that you understand your options.
Set Up Payroll Taxes Correctly
All business that pay regular employees must withhold federal, social security, Medicare, and state taxes from their paycheck and remit the funds to the proper governing authority. The amount is a percentage based on the employee’s earnings and the number of exemptions he or she claimed when completing the W-4 form at the time of hire. The social security deduction is a straight 6.2 percent while Medicare is 1.45 percent. You must also match these deductions as the employer.
The IRS and state governments expect timely payment of payroll taxes, typically within just a few days of distributing payroll to your employees. Your options for remitting payment include by phone, using an online payroll tax filing service, and in person at a bank. You may be subject to large fines, loss of your business, and even time in jail for failing to make these payments.
Know the Difference Between Employee and Independent Contractor
Hiring independent contractors when you first launch your business can save you from paying benefits and payroll taxes. However, you cannot intentionally misclassify someone who meets the definition of permanent employee as an independent contractor. This would be a worker who has a regular schedule with your company and whom you hired on an indefinite basis. An independent contractor works on a project basis and may work for several clients at the same time. He or she is responsible for remitting income taxes independently.
These are just three of the many essential tax issues to consider when starting a business. Doerhoff & Associates knows you can use all the help you can get to run your small business successfully, and we are here for you. We strive to provide what you really want and need – a unique and customized set of services to fill the gap and support you, the business owner. Please contact us if we can provide you with further direction on this or any other small business accounting topic.
