Don’t let the process of starting a new business deter you from your future success! While it may seem overwhelming, the IRS has provided a number of great resources to help brand-new business owners understand their tax responsibilities.
Below are some tax basics for setting up a new business:
Choose a business structure
The type/form of a business determines which income tax return a business will need to file. The most common business structures are:
- Sole proprietorship: An unincorporated business owned by an individual. There’s no distinction between the taxpayer and their business.
- Partnership: An unincorporated business with ownership shared between two or more members.
- Corporation: Also known as a C corporation. It’s a separate entity owned by shareholders.
- S Corporation: A corporation that elects to pass corporate income, losses, deductions and credits through to the shareholders.
- Limited Liability Company: A business structure allowed by state statute. If a single-member LLC does not elect to be treated as a corporation, the LLC is a “disregarded entity,” and the LLC’s activities should be reflected on its owner’s federal tax return as a sole proprietorship.
Choose a tax year
A tax year is an annual accounting period for keeping records and reporting income and expenses. A new business owner must choose either:
- Calendar year: 12 consecutive months beginning January 1 and ending December 31.
- Fiscal year: 12 consecutive months ending on the last day of any month except December.
If an individual files their first tax return using the calendar tax year and later begins business as a sole proprietor, becomes a partner in a partnership, or becomes a shareholder in an S corporation, they must continue to use a calendar tax year unless they get IRS approval to change it.
Apply for an Employer Identification Number
An EIN is also called a Federal Tax Identification Number and it is used to identify a business, much like a person’s social security number. Most businesses need one of these numbers, but some don’t. For example, a sole proprietor without employees who doesn’t file any excise or pension plan tax returns doesn’t need an EIN. The EIN checklist on IRS.gov can help business owners know if they need an EIN.
Make sure all employees complete these forms when hired:
- I-9, Employment Eligibility Verification U.S. Citizenship and Immigration Services
- W-4, Employee’s Withholding Certificate
Pay yearly business taxes
The form of business you chose above determines what taxes should be paid and how to pay them. Check with your business accountant to find out what tax liabilities you are responsible for.
Visit the state’s website
Prospective business owners should also visit their state’s website for info about state tax requirements, as those may be different than federal tax obligations.
Talk to a tax professional
Before you fill out any paperwork or online forms to set up a new business, speak with a tax professional to make sure your forms are filled out correctly! Give us a call at 412-931-1617 or shoot us an email at [email protected].
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