Planning for taxes can spell the difference between success and failure of your small business.
That’s why every startup needs to understand their tax responsibilities.
Depending on your type of business, the business structure you choose and the location of your new business, you may be responsible for:
- Self-employments taxes, which includes Social Security and Medicare
- Estimated taxes
- Federal and state income taxes
- State and local sales taxes
- Federal and state unemployment taxes
Perhaps the most overlooked tax responsibility for startups is the self-employment tax.
“Most people have heard about self-employment taxes,” says NASE National Tax Advisor Keith Hall, a certified public accountant. “But, they’ve never had to do anything about them. The employer did everything. So for new business owners, the biggest tax surprise is usually self-employment taxes.”
When you had a corporate job, your employer sent an amount equal to 15.3 percent of your wages to the federal government to cover taxes for Social Security and Medicare (also known as FICA). Half of that total came out of your pocket. The other half came from your employer.
Now that you have your own business, you get to pay the whole share of FICA.
If you worked for a boss, your employer would withhold part of your wages and send it to Uncle Sam to pay your federal income taxes, much like the withholding of FICA taxes.
But as a self-employed business owner, you’re the boss, which means you’re responsible for paying those income taxes.
The government expects those taxes from you every quarter. They’re called estimated taxes. And if you don’t pay them on time or if you underpay, you’ll also owe the government penalties and interest.
“Estimated taxes can be confusing, especially for business owners who are new to self-employment,” says Hall. “But figuring them correctly and paying them on time is critically important.”
Sole proprietors, partners, LLC members and even S corporation owners who receive pass-through profits may be required to pay estimated taxes, depending upon their total tax liability for the year.
Generally, if you expect to owe $1,000 or more in taxes for the year, you must make quarterly estimated tax payments.
“Whether or not you need to make estimated tax payments is determined by your family’s total tax position, not just the business,” explains Hall. “For example, if your spouse works and has enough withholding from that job to cover your tax liability, then you would not have to make estimated tax payments.”
Your estimated taxes should reflect your family’s total expected tax liability. That tax liability will depend on many items, including:
- Amount of family income
- Itemized deductions
- Withholding from an employer
- Number of dependents
- Amount of business profit or loss
For more information about calculating estimated taxes, download IRS Publication 505, Tax Withholding and Estimated Tax from the IRS website, and visit the NASE Tax Resource Center.
There are a host of other taxes your business may be responsible for paying, such as:
- Sales tax, if you sell taxable goods
- Business property taxes, depending on the tax regulations in your state
- Federal and state unemployment taxes, if you hire employees
The sheer number of different taxes can be overwhelming to new business owners.
“The biggest mistake new business owners make with regard to taxes is lack of planning,” says Hall. “If you do the planning, you won’t be surprised by your tax responsibilities.”
By planning, you’ll be more likely to pay your taxes on time so you can avoid paying penalties and interest. Tax planning also makes you aware of credits and deductions that can change each year, says Hall.
“If you don’t plan, you can’t take advantage of many tax credits, deductions and other opportunities that will save you money.”
Hall recommends that new business owners get these IRS publications for starters:
The NASE can help
The NASE offers books, blogs, webinars, online consultants and other educational resources to help you learn about your tax responsibilities.
Read answers to questions asked by other micro-business owners and ask the CPAs specific tax questions about your new business.
NASE Tax Resource Center
- Up-to-date tax news
- Quick tax calculators
- Schedule C planning tool
- Interactive tax calendar
- Prepare your taxes online and e-file
- Links to IRS forms and publications
- Are startup costs deductible?
- Estimated tax payments
- How do you pay yourself?
- Using a business account
- And more
Schedule C: from A to Z; The Sole Proprietor’s Guide to Tax Savings
If you’re a sole proprietor, this book will give you straightforward answers for preparing and filing you income tax returns. The book was written by two certified public accountants, NASE President Robert Hughes and NASE National Tax Advisor Keith Hall. You’ll find a line-by-line breakdown of the Schedule C and home office deduction tax forms.
To print, click here to download the full Startup Kit.