You’ve already started a new business and have even been grinding for at least a year, but did you make sure everything was squared away with the IRS?
There are a few things the government requires new businesses and independent contractors to establish in order to determine legitimacy.Don’t freak out, the IRS is not going to come after you if you didn’t do these things – but you should make it your priority to tackle these items as soon as possible.
Decide on your business structure.
This is an early decision to make – what you decide determines what tax forms you fill out. Here are the most popular structures:
- Sole proprietor the most common structure. It’s easy to form: all you have to do is say you are in business and begin operating in said business. This structure offers complete control to the owner.
- Partnership or Limited Liability Company involves two or more people who agree to share in the profits,losses, assets and liability of a business.
- C Corporation is a legal entity that is created to conduct business. The corporation becomes an entity-separate from those who founded it-that handles the responsibilities of the organization. Like a person, the corporation can be taxed and can be held legally liable for its actions. This is the most formal way of structuring a business. Many startups incorporate because they one day plan to be bought out or go public (big status shit).
- S Corporations are similar to C Corporations listed above, except they elect to pass corporate income, losses, deductions, and credits through to their shareholders allowing the shareholders to get taxed, not the business.
Click here to learn more detail about these structures and how to determine what’s right for you. If you are just starting out in your business, it’s totally okay to go the sole proprietorship route; that way you won’t be wound up with anxiety thinking about all the paperwork, annual taxes ($800 minimum tax inCA), and legal implications of choosing a formal business structure. Don’t fret the technical stuff: get good business liability insurance and get started in your business! .
Know what your business taxes are.
There are four general types of business taxes. They are
- Income tax,
- Self-employment tax,
- Payroll tax
- Excise tax.
This is based off (you guessed it) the business structure you chose before. Everyone has to pay income tax and self employment tax as business owners, but each situation is different and it’s best to check with the IRS to see what applies to you.
Get an Employer Identification Number (EIN).
You might need to get an EIN for federal tax purposes, depending on your situation. If you’re a sole proprietor, you don’t necessarily need an EIN but why would you choose to expose your SSN to vendors, banks, contractors? Instead, apply for a EIN in seconds and use it instead of your SSN for all business related matters.
Even though having an EIN is optional for sole proprietors, there are instances in which having an EIN is required:
- hire employees
- have a Keogh or Solo 401(k) retirement plan,
- buy or inherit an existing business that you operate as a sole proprietorship
- file for bankruptcy.
Choosing between business structures, figuring out what tax obligations pertain to you and protecting your identity by obtaining an EIN instead of using your SSN are 3 huge action items any business owner or entrepreneur must sit down and implement. These are the serious things in business that we naturally don’t want to deal with but are huge when it comes to tax savings and protecting your assets.
To more money in our pockets,
P.S. I’m hosting a webinar this coming Thursday! It’ll be filled with gems to help you grow your profits. Be sure to claim your spot before time runs out! Hope to see you there 😉
P.P.S. Make sure you join my super cool free Facebook group. You will mingle with other #bombass entrepreneurs and receive important tax reminders and tips. We also are super encouraging – it’s like a support group every Boss Woman didn’t know she needed.