Start-Up Tax Issues
Created by FindLaw's team of legal writers and editors | Last reviewed September 26, 2022
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It is vitally important to understand your tax obligations when starting a small business, including effective record-keeping and deductions. FindLaw's “Business Start-Up Taxes” section includes information and resources to help new entrepreneurs get up to speed on accounting practices, obtaining an employer identification number, business deductions, self-employment taxes, and related matters.
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Federal Business Taxes: Introduction
A new business should be prepared for the kinds of taxes that they will be required to pay. There are four general kinds of federal taxes relating to business:
- Income Tax - Income taxes may be charged to businesses organized as corporations or limited liability companies (LLCs), while other businesses are taxed through the income of the principal owner. Business income tax is paid as-you-go; usually paid on income earned during the year. Employees, by comparison, typically have their taxes withheld from their pay. Businesses must frequently make periodic estimated tax payments throughout the year.
- Employment Tax - Businesses with employees must pay certain employment taxes including Social Security, Medicare, federal income tax withholding, and federal unemployment tax.
- Self-Employment Tax - Self-employment tax is payment into the Social Security and Medicare programs by an individual that works for themselves.
- Excise Tax - Businesses pay an excise tax when they purchase specific goods, such as gasoline. Excise taxes are often included in the price of the good sold, but there are also excise taxes on some activities, such as wagering or highway usage by trucks.
State and Local Taxes: Introduction
In addition to federal tax obligations a new business should be aware of state and local tax obligations. These obligations may vary greatly between states or cities and it is critical that you investigate or contact local authorities to determine your obligations early in the process of forming a business. Typical obligations include payment of the following:
- State Income Tax - All businesses pay state income taxes. As with federal taxes some business pay taxes on their own behalf, while other businesses may be taxed through the income of the principal owner(s).
- State Employment Tax - Employers may be required to withhold a portion of their employees' earnings and pay them toward their income tax, unemployment tax, and state workers' compensation insurance programs. Employers may additionally be responsible for retaining the business' payroll and employment tax records for a certain number of years.
- Local Tax - Small business owners may also be required to pay certain taxes to their city or county. Common local taxes include operating taxes, property tax, sales tax, and in some larger cities a separate income tax.
Taxes: The Importance of Record-Keeping
Apart from the legal obligations a business may have to maintain accurate records there are a number of reasons a shrewd businessperson will want to keep comprehensive records. Financial records can help you monitor your business's progress. Profit can be difficult to determine without a clear record of income and expenses. Accurate records can also help determine which business activities are producing the largest profits for your business, allowing you to direct your energy and assets to those activities that give the highest return.
Accurate records can assist in the preparation of financial statements for use in tax filings or to apply for a loan or credit on behalf of the business. Maintaining record of the source of receipts can help ensure that proper deductions are claimed and deductions questioned by a tax authority have the appropriate support. Comprehensive records assist with the preparation of tax returns and provide a defense against any suspicion of wrongdoing.
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