Tax Checklist for Starting a Small Business
There are many things a person must figure out when starting a business. Business structure, office location, and business tax obligations are just a few things that a future small business owner must consider before opening their doors. The checklist below provides the basic tax-related steps you should follow to start a business. When reading this tax checklist, please keep in mind that this is a general guide and is not meant to be an all-inclusive list.
___1. Select a business structure: Once you select a business structure, determine if you need to apply for a federal Employer Identification Number (EIN). Your business structure will also affect your tax obligations. For example, most corporations are taxed as a separate entity, while limited liability companies (LLCs), sole proprietorships, and partnerships are generally taxed on the owner's individual tax returns.
___2. Start your tax year, choose your accounting method, and keep records: Your tax year is the accounting period for reporting income and expenses, and keeping records. Your tax year can be a calendar year (January 1st to December 31st) or a fiscal year, which runs for 12 consecutive months that ends on the last day of any month, except December (in which case it would be calendar year).
Once you select a tax year, it's important to pick an accounting method. Whether you choose the cash accounting or accrual accounting, it's important to keep good records. Doing this will help you prepare your income statements, balance sheets, prepare taxes, and support the information provided on your tax return if the Internal Revenue Service (IRS) asks for additional information or audits your business.
___3. Learn about the types of federal business taxes that may apply to your business: The federal taxes that your business will be liable for will depend on your business structure and your industry. The general types of business taxes are income tax, self-employment tax, employment taxes, and excise taxes. Businesses are also usually required to make estimated tax payments throughout the year with Form 1040-ES, Estimated Tax for Individuals, or Form 1120-W, Estimated Tax for Corporations.
If you are a nonprofit organization, you should consult Publication 557, Tax-Exempt Status for Your Organization, provided by the IRS.
___4. Learn about your Social Security reporting requirements: If you decide to hire employees, you will have certain reporting requirements when it comes to Social Security. Your main requirement will be to file a W-2 for each employee. Remember, you don't need to file W-2s for any independent contractors that work for your business.
___5. If you have employees, you will need to meet certain federal employment tax and withholding requirements: Generally, an employer must pay employment taxes and withhold a portion of each employee's wages for income, Social Security, and Medicare taxes. You can figure out how much to withhold by having each employee fill out Form W-4, Employee's Withholding Allowance Certificate. The IRS provides more information about this in its Publication 15, Employer's Tax Guide, and Publication 15-A, Employer's Supplemental Tax Guide.
If you are in the agriculture industry, read IRS Publication 51, Agricultural Employer's Tax Guide.
___6. Find out your state and local tax liabilities: In addition to federal taxes, your business will also need to pay state and local taxes. While these taxes will vary based on the location of your business, some common state and local taxes can include property tax, state income tax, and state unemployment taxes. The IRS provides links to state government websites where you can learn more about business income tax, how to pay it, and other business regulations in your state.
Getting Legal Help
It's very important to fulfill all of your business tax requirements because noncompliance can have a crippling effect on your business. An experienced business organizations attorney can help you make sure your business is in compliance with all tax laws and any other laws applicable to businesses in your industry and location.
For more information and resources related to starting and running your own business, you can visit FindLaw's Small Business Law section.