The experienced professionals at Edge Financial are your resource for the latest and greatest news, tips, and information for all things tax.
When starting a business, there are so many things to worry about, from where will it be located? To how many employees do I need? All of the major decisions lead to the ultimate goal of being successful and making money! Some of the more tedious things business owners do not often consider can ultimately become very costly and create very big headaches. Don’t let the taxes be one of them!
We have created a simple to follow check list for small business owners like you, who want to do things the right way!
Every year (calendar year or annual accounting year) your business must file a tax return after determining your taxable income. There are 2 major account methods: Accrual or Cash. You will need to choose your method based on the set rules of each method that determines when and how you report your income and expenses for the business.
Cash: Cash method is used by most sole-proprietors and self-employed individuals. This is a method that is pretty simple and straight forward. The main concept in this method is that you declare it in the year your receive or pay. Example : If I am Johnny’s plumbing Service , and I invoice a person for $500 in December 2016, but they send me the check on January 2, 2017, Well then, that $500 is not counted until the next tax return is filed for 2017, because that is the year in which I was paid.
Accrual: Under this method, you record your income and expenses the moment they are issued. This means, once you invoice someone, you record it as income, or once you receive a bill (weather you have paid it or not) you count it as an expense. This method will have 2 parts to it. The date in which you earned money/accrued liability, and the date in which it was actually paid.
Upon starting your new business, you will need to apply for a Federal Tax ID through the IRS, also known as a Employer Identification Number (EIN). (If you’re a sole proprietor with no employees or you have a single-owner Limited Liability Company, you can use your Social Security number instead.) To get an EIN, you can apply with the IRS online or call the IRS at (800) 829-4933.
As a small business owner, no one is in charge of taking out your taxes for you. Remember once upon a time when you received your pay check and at the bottom it showed what was withheld for your income taxes? Well now you are responsible for that. Although they are paid a little differently, these are your anticipated tax dollars owed for the income your business will earn. Typically these Estimated Tax Payments are paid quarterly. For the 2015 tax year, the four estimated tax payment dates are: April 15, June 15, September 15 of 2015 and January 15, 2016.
If you’re mailing payments to the IRS, use Form 1040-ES. Or you can pay electronically by enrolling in the Electronic Federal Tax Payment System (EFTPS). When you start up your business and request an employer identification number from the IRS (see below under “Employment Taxes”), the IRS automatically enrolls you in EFTPS.
If you have employees, you must pay the employer share of their Social Security and Medicare taxes, and withhold their share of those taxes from their wages. You must pay 7.65% and your employee must pay 7.65% on the first $118,500 of the worker’s wages.
For income above that level, you and your employee must keep paying only the Medicare portion of the tax, which is 1.45% for each of you. The taxes must be deposited with the IRS periodically; how often you send in these funds depends on how large the deposits are. You can deduct the employer share of these employment taxes as a business expense on Schedule C.
What about your own employment tax liability?
If you’re a sole proprietor, partner, independent contractor or are otherwise self-employed, you must pay the full freight—15.3% in 2015 on the first $118,500 of your net earnings from self-employment, which you calculate on Schedule C. For net earnings above that amount, you’ll still owe Medicare taxes of 2.9%. You can deduct half of your self-employment tax when figuring Adjusted Gross Income on your 1040. That’s not as good as paying half the liability—as employees do—but it’s better than nothing.
To ensure you only pay taxes on TRUE income earned, you will want to make sure you deduct all of your business expenses. DO NOT THROW AWAY THOSE RECIPTS! They really can come in handy and save you should the IRS question any expenses you claim. You are not allowed to deduct any personal expenses , so it is very important to keep your business and personal separated. We often recommend just using separate bank accounts all together.