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Confused by taxes? Use this guide to avoid costly mistakes

By Richard Close             

Taking the path of entrepreneur isn’t easy. Self management takes discipline that many fledgling business owners haven’ttaxes mastered. But even the masters make mistakes when it comes to the IRS and their taxes.

For small business beginners, masters, and everyone in-between, here is an ultimate small business tax guide:

1. Make sure your business is not a hobby. Key questions to ask are, “Do I engage in this business for profit?” “Do I depend on this activity for income?” and “Do I change methods of operation to improve profitability?” If the answer to any of these is “no,” the IRS may consider your activity a hobby and not allow it to take business deductions.

2. Determine your business structure. Next you have to determine which form of business entity to establish. This is important, because the structure determines which income tax form you have to file. The most common business types are:

• Sole proprietorship, which is an unincorporated business you own by yourself;

• A partnership, which is a business owned by two or more people who contribute to the business and are affected by profits and losses;

• A corporation, which is a structure owned by shareholders who exchange money, property, or both for the corporation’s stock. Incorporation is the best way to protect yourself when IRS issues arise, because the liability is the company’s not yours personally; and

• A limited liability company (LLC), which is a relatively new structure. It is popular because of the ease to attain it. Like a “regular” corporation, an LLC makes you less liable.

3. Obtain your employee ID number. After you determine your business structure, you’ll need an Employer Identification Number (EIN). This is used by the IRS to identify your business entity. You can apply for an EIN online on the IRS website, www.irs.govor you can use IRS Form SS-4. Generally, businesses need a new EIN number when their ownership or structure has changed.

4. Prepare for business taxes. The form of business you choose to operate determines the taxes you’ll be required to pay, along with when and how you pay them. Five types of business taxes exist:

• Income tax. With the exception of partnerships, all businesses must file an annual income tax return. Partnerships file an information return.

• Estimated tax. You must pay taxes on income, including self-employment tax, by making regular payments of Estimated Tax during the year.

• Self-employment tax. Self employment tax (SE tax) is a Social Security and Medicare tax. It’s primarily for individuals who work for themselves. Typically, you have to pay this if your net earnings from self employment are more than $400.

• Employment taxes. If you have anyone on your payroll, you must pay your employees’ Social Security and Medicare taxes, federal income tax withholding, and federal unemployment (FUTA) tax. You’re also required to file certain forms on your employees’ behalf. Failure to do so will bring serious consequences.

• Excise tax. This tax is imposed only on those businesses that manufacture or sell certain products, operate certain kinds of machinery, or receive payments for certain services. 

5. Establish record keeping and accounting methods

Keeping good records is vital for preventing tax problems down the line. All of the information provided in this guide is simply a brief overview of all of the complexities involved in paying taxes for a business; it’s incredibly difficult to stay afloat with so many rules to adhere to. If you don’t feel like you can dedicate yourself to keep records on every purchase your company makes, consider relegating this task to a staff accountant.

richard-close-head-shotRichard Close is a former IRS revenue officer and is currently the tax resolution program director at Tax Defense Network, www.taxdefensenetwork.com.

 

 

SIDEBAR 1

Too much to handle? How to choose a tax preparer or CPA

If you feel overwhelmed by your tax obligations, hire a reliable professional to ease the burden. But how do you find one you can trust? The National Society of Accountants (www.nsacct.org) suggests staying away from any tax preparer who:

·         Refuses to answer questions. Don’t let a shifty tax preparer drag you down. You have the right to answers.

·         Demands a cut of your tax refund. This provides incentive for the tax preparer to do anything it takes to increase the amount of your refund- even going against IRS codes and policies.

·         Guarantees a tax refund or IRS settlement. Sorry, but there are no guarantees with the IRS, especially when it comes to tax refunds or settlements.

As you consider hiring a tax attorney or a tax resolution service, look at:

  • BBB rating. Choose a company that meets the Better Business Bureau’s (BBB) official standards for accreditation and make sure it has an A-rating or higher and no unresolved complaints.
  • Dun & Bradstreet. Make sure the company adheres to Dun & Bradstreet’s highest quality standards. Dun & Bradstreet is the world’s premier source of commercial information and insight on businesses.
  • Stability. How long has the company been in business? Look for a company that has a good history.
  • Chamber of Commerce. Consider a company that is a member of the local and/or U.S Chamber of Commerce.

SIDEBAR 2

The best online resources

Taxes are confusing. Here are some online resources that can help clear the muddy waters for you.

  • Business.gov. Business.gov guides you through the maze of government rules and regulations and provides access to services and resources to help you start, grow, and succeed in business.
  • GobiernoUSA.gov. The U.S. government’s official Spanish-language Web portal.
  • SBTV.com. SBTV.com is an online television network that provides streaming video content to small businesses. It gives technical information on how to run your business, inspirational stories from entrepreneurs across the country, information about small business conferences and events, and resources to help solve day-to-day business challenges.
  • USA.gov. The U.S. government’s official website.
  • IRS.gov. Search small business or go to the business section in the menu for detailed, comprehensive information straight from the source.

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