When it comes to starting a small business or a start-up, many people often think about taxes as a secondary concern. However, it is important to keep in mind that taxes can affect the profitability of your business and could even play a crucial role in its long-term sustainability. That is why being informed about the tax considerations for start-ups and small businesses is essential. In this article, we will discuss some critical tax considerations that start-ups and entrepreneurs should keep in mind when launching and growing their businesses.

 

Business Structure:

One of the first tax considerations small business owners need to focus on is choosing the right business structure. The structure you choose can have significant implications for your taxes. For example, sole proprietorships, partnerships, LLCs taxed as sole proprietorships or partnerships, S-corporations, and C-corporations are all treated differently under the tax code. Sole proprietors, partnerships, and S-corporations report their business income on their personal income tax returns. However, C-corporations pay taxes separately, with a current flat tax rate of 21% on profits.

Additionally, your chosen structure, referred to as your entity classification election, will impact how you deduct certain business-related expenses. For instance, a partner in a partnership would deduct business vehicle expenses & home office expenses as unreimbursed partnership expenses on their personal tax return. On the other hand, in an S-corporation, you would need to establish an accountable plan to deduct expenses related to your business vehicle or home office. Therefore, the way you structure your business is crucial in determining the tax benefits and deductions you can access.

Once you have selected the right structure, your first step as a startup is to register your business with the state to operate legally. Moreover, you may need to register for state and local taxes, such as sales tax, if you are selling taxable products. This process also includes obtaining the appropriate licenses and permits and securing a tax identification number.

 

Sales Tax:

If you are starting a small business that sells tangible or digital products, you more than likely will need to collect and remit sales tax. The sales tax rate, collection frequency, and registration requirements vary depending on the location of your business. It is essential to understand the sales tax laws in your state and the way they apply to your business. Sales tax compliance is not just about avoiding penalties and interest; it may also affect your pricing strategy and bottom line.

 

Payroll Taxes:

When hiring employees or paying yourself as an employee, managing payroll taxes is required, which involves withholding income taxes, Social Security, Medicare taxes, and making matching contributions. It is important to collect all required forms from your employees, such as W4s and I-9s if applicable. Most times your payroll service provider will take care of gathering this information for you during the employee onboarding process. Dealing with the tax code and compliance for payroll taxes can be complex. You must keep in mind that this is a vital responsibility as you are withholding taxes & contributions to the social security system on behalf of your employees and remitting them to the Internal Revenue Service and respective state agencies. Failing to do this can result in huge penalties. It’s recommended to enlist the help of an experienced accountant or payroll service to navigate the rules and prevent expensive errors.

 

Deductions and Credits:

Start-ups and small business owners can take advantage of numerous deductions and credits within the tax code. Generally, any expense that is ordinary and necessary for operating your business is deductible. However, there are exceptions, such as entertainment expenses and gym memberships, which are not deductible. On the other hand, there are several deductions available, including home office deductions and vehicle expense deductions for the business use of your vehicle.

You can also maximize your deductions by speeding up how you claim certain expenses. For example, using options like Section 179 and bonus depreciation, you can deduct the full cost or a large part of qualifying equipment and software purchases all at once in the same year you buy them, rather than spreading the deduction out over several years as normally required. Additionally, there are many tax credits available for businesses that invest in eco-friendly initiatives or hire specific types of employees, like veterans or workers with disabilities.

 

Planning and Record Keeping:

The key to managing taxes for your small business is effective planning and diligent record keeping. It’s essential to maintain clear, organized accounting records and to keep business and personal expenses separate. Additionally, calculating and paying your estimated taxes each quarter is crucial to avoid penalties and ensure you are staying on top of your tax obligations throughout the year. We provide quarterly estimated tax calculations as part of our services, helping you stay compliant and avoid surprises at tax time.

We recommend scheduling regular reviews of your financial statements with your accountant or tax professional to ensure you are meeting all tax requirements and taking advantage of any potential savings. Proper planning can help reduce your tax liability and preserve more of your profits.

If you need help getting your bookkeeping in order, we offer bookkeeping advisory services to guide you in learning how to manage your own bookkeeping effectively. This way, you can stay organized and confident in handling your business finances.

Starting a small business or a start-up can be an exciting adventure. Still, it is crucial to understand the tax considerations involved in running a small business. From choosing the right business structure to managing payroll and sales tax, there are many tax compliance issues that small business owners need to keep track of. By following some of the tax considerations discussed in this post and seeking professional guidance when needed, you can ensure that your business stays compliant and financially healthy.