Paying taxes is a necessary part of doing business. It’s probably the least favorite part of doing business. Understanding your obligations and how to proceed goes a long way in alleviating any anxiety about taxes and ensuring that you’ll avoid problems.
Become tax savvy
You don’t have to be a CPA to understand how taxes impact your business and what you have to do to stay compliant. Even if you use a tax professional to prepare your returns (as the vast majority of small-businesses owners do), it’s up to you as a business owner to understand how taxes influence your business decisions and the steps you need to take to avoid penalties and other costly mistakes.
For example, understand what it means from a tax perspective to buy versus rent equipment and other property. Know whether the worker you’re engaging is your employee or an independent contractor, and what this means for your tax responsibilities.
Check out the IRS’s Small Business and Self-Employed Tax Center to find information and resources that can help you on such topics as:
Also visit your state’s revenue or tax department to learn about responsibilities on state and local levels. And listen to guidance from your tax professional.
Determine whether you need a special tax ID number
You may be able to use your Social Security number as your federal tax identification number. Or you may need to obtain a separate employer identification number (EIN), whether or not you have any employees. Review a simple IRS checklist to learn whether you must obtain an EIN.
Even if you’re not required by the IRS to get an EIN, you may want or need one. For example, if you are an independent contractor who is not required to use an EIN, you may obtain one to give to companies you deal with so you don’t have to share your Social Security number. Or your bank may require an EIN to open a business bank account, even though you don’t need an EIN for tax purposes.
You can obtain an EIN online from the IRS.
Figure out how to keep your books and records
The tax law requires all businesses to keep books and records for income and expenses. Doing this not only allows you to file your returns, but also to monitor how your business is doing.
There’s no required way to keep track of your income and expenses. You can, for example, keep paper ledgers and paper receipts. Even better, you can use software or cloud solutions for accounting products (e.g., QuickBooks, Xero); you don’t need any accounting background to use them. Also consider using apps for various recordkeeping needs, such as tracking travel and entertainment costs. And think about scanning receipts, paid bills and invoices and other records for easy storage and retrieval.
Pay your taxes
If you are self-employed, you can’t wait until you file your return to pay your taxes; you likely will have to pay your taxes quarterly through estimated taxes (which is not a separate tax but a method of payment) in order to avoid underpayment penalties. There’s no automatic withholding for this purpose as there is for W-2 employees, so be sure to set aside enough revenue to cover these required payments.
Estimated taxes must also cover self-employment tax, which is an umbrella payment for Social Security and Medicare taxes. Self-employment tax amounts to both the employer and employee shares of FICA; it applies to net earnings from self-employment tax (essentially your profits) and is not dependent on the amount of money you withdraw from the business for your personal needs. Again, be sure to have sufficient cash on hand to pay your self-employment tax as part of your quarterly estimated taxes. I have a separate bank account where I set aside funds to pay my taxes.
Watch filing deadlines
It may be your busy season or you’re on the road when the date for filing returns or paying taxes rolls around. If you fail to file returns and pay taxes on time, you can be subject to late-filing and late-payment penalties. These penalties can build up and cost you dearly. They are easily avoided by keeping track of when you have to take action.
View the IRS’s Tax Calendar for Businesses and Self-Employed Individuals so you’ll never miss a deadline.
If you have any employees, your tax responsibilities grow. You probably have to deposit payroll taxes on a set schedule and file additional returns for employers. Be sure to understand the full scope of your tax obligations and what you need to do in order to stay compliant.
This information is provided for informational purposes, may not be applicable to all situations, and is not intended to provided legal, tax, or financial advice. For specific advice about your unique circumstances, you may wish to consult a qualified professional.