If you’re looking to start your own small business, know what you are going into. It’s an exciting time to go into business for yourself and pursue what you really want professionally.
While it’s an exciting time, it’s also a time that you must prepare for, especially with tax knowledge. According to entrepreneur.com, knowing how to handle your taxes for your business will affect how you set up and classify.
How will you classify your small business?
Classifying your business will determine how you pay your taxes. You could classify as a partnership, a limited liability corporation (LLC), a corporation, an s-corporation, a sole proprietorship, or a cooperative. Entrepreneur.com suggests that you form an LLC or s-corp., saying those protect the owner from the business liabilities and have tax advantages.
The U.S. Small Business Administration lays out each of these classifications and breaks down the differences among them. Ultimately, the choice is yours. We’ll focus on two setups here.
Attorney Kenneth Bloom of Bloom, Bloom & Associates, P.C., compares sole proprietorships and LLCs and says that members, who he explains are investors in the business, don’t pick up personal liability for the taxes of the business. He says that whether you classify as a sole proprietorship or an LLC, if you have employees, you’ll need a taxpayer identification number. However, he says if you don’t have employees, you can use your Social Security number as your taxpayer identification number.
Bloom says that forming an LLC costs $1,000 on average. He says it could benefit you in the long run instead of taking on liabilities sole proprietors face.
Paying taxes on payroll
According to entrepreneur.com, a business owner will pay personal federal and state taxes on any salary he or she receives, which means business federal and state withholding taxes. Entrepreneur.com says a business owner must take income tax, FICA, and FUTA out of paychecks and has to match FICA withholding, and that can complicate things.
Entrepreneur.com says to also mind that most states will require you pay state unemployment taxes.
Entrepreneur.com says that paying for payroll service to do your calculations can ease this process. Entrepreneur.com says that LLCs split their business profits among their owners pro rata, and if the company has earned enough money, the business needs to file withholdings on a quarterly basis or face getting a tax penalty when the year ends.
Additional business expenses
According to entrepreneur.com, a business may need workers’ compensation insurance, but that will depend on state regulations. Entrepreneur.com explains that businesses with three or more full-time employees must carry it.
According to entrepreneur.com, if you’re selling a product instead of a service, you’ll pay sales tax. Entrepreneur.com also explains that depending on state regulations, you may need to register with the State Corporation Commission and pay a yearly license fee.
Starting a business can be an exhilarating step. It also requires much preparation. Make sure you know how you want to move along with your entrepreneurial plan.