Taxes are often a confusing topic for startup owners. This is because it requires a lot of documents, entails various deadlines, and involves a lot of numbers that any excited business owner wants to quickly set aside and delegate to a professional.
The truth is, taxes aren’t actually that complicated — especially when you’ve figured it out for your business. A startup is taxed based on their business structure. Which includes the following:
• Sole Proprietorships
• Limited liability company (LLC)
The Balance explains how sole proprietorship is taxed based on the business income stated on the owner’s personal taxes, which is the same with partnerships. On the other hand, corporations are a separate entity, which results in double taxation — the owner has to pay income taxes on the business’s profits, and the business itself needs to pay corporate tax as well.
Alternatively, LLCs provide a little more flexibility when it comes to tax. A guide to forming an LLC by ZenBusiness points out that LLCs allow entrepreneurs to avoid double taxation, as they’ll get to pay their business taxes through their individual tax returns, rather than paying corporate taxes and personal taxes on their income as corporate shareholders do. LLC owners also have the option to be taxed as a corporation, which may be advantageous once business picks up. Of course, it’s best to choose your business structure with the future in mind.
How much you should set aside for taxes also depend on a number of factors, but a good benchmark is to set aside 30-40% of your income to cover federal and state taxes. Here are some factors to consider when it comes to your taxes:
State income tax has changed, thanks to the Tax Cuts and Job Act. This ensures a single corporate tax rate of 21%. Additionally, not all states have income tax, and some states have business taxes that favor startups and small businesses more. For instance, Florida has no individual income tax, while Nevada has no corporate or individual income tax. On the other hand, New York, California, and New Jersey are known to have high tax rates.
Depending on how you operate, you’ll get to reduce some costs from your taxes — which is an important tax strategy for any startup. Surprisingly enough, Small Business Trends notes that you can reduce startup costs incurred in your first year of business — up to $5,000 in startup costs, and $5,000 in organizational costs. Other deductibles include car and truck expenses, salaries and wages, depreciation, utilities, insurance, and much more.
How you label the people who work for the startup matters a lot during tax season. If they’re employees, they’ll have a right to worker’s compensation, unemployment insurance, at least minimum wage, overtime pay, and payroll taxes. If you mislabel employees as independent contractors, even if they’re truly employees, the IRS could see it as an attempt to avoid payroll taxes — which leads to penalties.
Steps to pay your taxes
In order to start paying your taxes, here are the following steps:
1. Gather the right documents from the right places. For federal income and self-employment taxes, you’ll need to go to the IRS. Go to the Secretary of State or department of revenue for state business taxes and local business taxes on sales or income, and your local business registration office for property or other types of taxes. You’ll also get a good idea as to what’s involved in filing small business taxes for the first time and paying any tax due.
2. Fill out the required forms. Once you’ve figured out which documents you’ll need from the appropriate places, the next step is to fill these forms out as thoroughly as possible. Fortunately, tax authorities are using online electronic filing to submit tax forms. You’ll even get to use tax software or outsource services for certain business taxes. Our guide to ‘7 Fat Reasons to Outsource’ recommends outsourcing, as you’ll get to focus more on core activities, be more efficient, and even save money in the long term.
3. Once you’ve completed your forms, all you’ll have to do is submit them to the right authority. You can do this electronically, or file it by mail if you have a choice.
Article written by Shirley Curtis and published exclusively on thecitymix.com