Starting a business is rewarding, but it can also feel overwhelming. Between business plans, marketing and taxes, there is a lot to think about. These tax tips can help new business owners get off to a good start.
1. Choose a business structure
Your business structure decides which tax returns you file and how you pay tax. The most common structures are:
- Sole proprietorship: an unincorporated business owned by one person. For tax purposes, the owner and the business are the same.
- Partnership: an unincorporated business owned by two or more people.
- C corporation: a separate entity owned by shareholders. It pays its own income tax.
- S corporation: a corporation that elects to pass its income, losses, deductions and credits through to shareholders.
- Limited liability company (LLC): a structure created under state law. It can be taxed as a sole proprietorship, partnership or corporation.
For help choosing, see our guide to business formation.
2. Pick a tax year
A tax year is the yearly period for keeping records and reporting income and expenses. Most new business owners choose a calendar year, which runs January 1 through December 31. Alternatively, some choose a fiscal year, which is 12 months ending on the last day of any month other than December.
3. Get an employer identification number (EIN)
An EIN is a federal tax ID number for your business. Most businesses need one, especially if they have employees or more than one owner. You can apply for free on the IRS website.
4. Set up payroll correctly
If you hire employees, have each one complete Form I-9 to verify they can work in the U.S. Also, have them complete Form W-4 so you can withhold the right amount of income tax.
5. Understand the taxes you must pay
Your business structure determines which taxes you owe and how to pay them. For example, these may include income tax, self-employment tax, estimated tax and employment taxes. In addition, each state has its own rules for starting and running a business, so check your state’s website.
For more guidance, see the IRS Small Business and Self-Employed Tax Center.
Get help as a new business owner
We help new business owners set up their entities, books and payroll the right way from the start. To learn more, call (415) 842-2940 or book a free 15-minute call.