If you start a business, one key to success is to know about your federal tax obligations. You may need to know not only about income taxes but also about payroll taxes. Here are five basic tax tips that can help get your business off to a good start.
1. Business Structure. As you start out, you’ll need to choose the structure of your business. Some common types include sole proprietorship, partnership and corporation. You may also choose to be an S corporation or Limited Liability Company. You’ll report your business activity using the IRS forms which are right for your business type.
2. Business Taxes. There are four general types of business taxes. They are income tax, self-employment tax, employment tax and excise tax. The type of taxes your business pays usually depends on which type of business you choose to set up. You may need to pay your taxes by making estimated tax payments.
3. Employer Identification Number. You may need to get an EIN for federal tax purposes. Search “do you need an EIN” on IRS.gov to find out if you need this number. If you do need one, you can apply for it online.
4. Accounting Method. An accounting method is a set of rules that determine when to report income and expenses. Your business must use a consistent method. The two that are most common are the cash method and the accrual method. Under the cash method, you normally report income in the year that you receive it and deduct expenses in the year that you pay them. Under the accrual method, you generally report income in the year that you earn it and deduct expenses in the year that you incur them. This is true even if you receive the income or pay the expenses in a future year.
5. Employee Health Care. The Small Business Health Care Tax Credit helps small businesses and tax-exempt organizations pay for health care coverage they offer their employees. A small employer is eligible for the credit if it has fewer than 25 employees who work full-time, or a combination of full-time and part-time. Beginning in 2014, the maximum credit is 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers, such as charities.
For 2015 and after, employers employing at least a certain number of employees (generally 50 full-time employees or a combination of full-time and part-time employees that is equivalent to 50 full-time employees) will be subject to the Employer Shared Responsibility provision.
- Simplified Home Office Deduction –eligible to take a deduction of up to $1,500 based upon $5/Square Foot up to 300 Square Feet
- Credit Card Expenses – even if you are a cash basis taxpayer, you can deduct the expenses charged on your credit card at the time of bill receipt not based upon credit card payment amounts
- Sole Proprietor does not take a wage, but a draw. If you are a sole proprietor you make draws to pay yourself and this reduces owner’s equity. You do not get a paycheck, you pay taxes owed via quarterly estimated tax payment.
- Healthcare costs including portion of long-term care insurance is deductible, life insurance and disability insurance is not deductible. If spouse is employed and has eligible family medical plan, your healthcare costs are not deductible.
- Pre-tax savings for self-employed, SEP up to 20% of Self-employment income
- IRS Hot Items: Cell phones, Meals & Entertainment, Travel, Business Mileage, Business use of home..to name a few
- Sole Proprietor: Employ your children and you do not have to pay taxes, plus it is a deductible expense…use proceeds to fund a Roth IRA or 529 plan. No FICA/FUTA under age 18, under age 21 no FUTA. Limited to $6,100 annually.
- Real Estate Professional: rental losses of $25,000 if taxable income is under $100,000. Phases out completely if taxable income is $150,000 or higher.
- Rental Home: if you rent out a vacation/secondary home for 14 days or less, you do not have to report this as income.
- Gifting – up to $14,000 to an individual a year. If married, can gift up to $28,000. No limit if providing direct to the institution payment for a person’s medical expenses or college costs.