7 Things to Do When Starting a Business to Avoid Nasty Surprises
When you decide to start a business, taxes may be the last thing you think about.
However, not realizing that you owe the self-employment tax as well as income taxes can lead to a nasty surprise when you file your taxes. This post is aimed at avoiding that costly surprise.
But, before we discuss the self-employment tax, there are other important steps to take when you become self-employed. Here are the 7 things to do after you start your own business to avoid nasty surprises:
1. Set up bookkeeping right away
Even before you think about income taxes, be sure to set up bookkeeping using software like QuickBooks (either online or on your laptop). You don't want to be scrambling to find receipts at tax time or not be able to tell somebody if you are making money or not.
You can save time by downloading from your bank and credit card companies. If you become wildly successful, you can hire a bookkeeper to take over managing the input, downloading and reconciling.
If you set up things well, all income and every expense will be properly categorized for your profit and loss statement, or P&L, and for your balance sheet. The P&L is essential for preparing your tax returns. The P&L and balance sheet help you monitor your business to see how well you are doing. The balance sheet will also come in handy if you need to apply for financing.
To ensure that your bookkeeping is set up well, you may want to consult with an accountant.
2. Form an entity
For many small businesses, being a sole proprietor is appropriate. You avoid paying corporate excise taxes and filing annual reports. For income taxes, you just file on Schedule C of the federal form 1040.
However, if you have partners, you may want to form a partnership, corporation or LLC. Details on choosing are beyond the scope of this post.
If your business involves risks that could lead to law suits, form a corporation or LLC to shelter your personal assets from liabilities of the business that insurance may not cover. Make sure that any actions you take for the business are in your capacity as an officer or manager – i.e., never sign personally.
To ensure that you make the proper choice of entity, you may want to consult with an attorney.
3. Get licenses, file annual reports and pay local taxes
Certain businesses require a license to operate. If you hire an attorney to form your LLC or corporation, she can check this out for you.
Most entities are required to file annual reports. If you are not a single member LLC, you also have to file income tax returns for the entity. The entity in turn provides you with the information for your personal tax return, which would be in the form of a K-1 for an LLC, partnership or S corporation.
Your city may impose taxes on the personal property in your business. Be sure to find out so you don’t owe penalties for failing to file and pay.
4. Buy health and other insurance
In addition to liability insurance, you will want to obtain health insurance if you are no longer working for another employer. You may get favorable treatment for this expense on your income taxes – the IRS allows the self-employed to deduct health insurance on the front of your form 1040 – an “above the line” deduction. In this case, the “self-employed” includes over 2% shareholders of private corporations and members of LLCs.
You can also purchase insurance to cover damage to equipment, loss of data, identity theft and so on.
You may want to ask your accountant or attorney if she can recommend anyone for your insurance needs.
5. File payroll taxes
If you hire people to work for you and pay them over $600 per quarter in any year, you need to report the compensation. If they are independent contractors, you file a form 1099 with the IRS. If they are employees, you file a W-2 with the Social Security Administration. You also provide these forms to your people for the income tax filings.
If you have employees, you need to withhold and remit FICA and Medicare taxes. You have to remit what you withheld and make equal contributions to FICA and Medicare taxes for each employee. You will file and pay at least as often as every quarter.
Your employees may also request that you withhold and remit federal and state income taxes (unless you live in a state that does not impose income taxes). Failure to withhold and pay to the IRS and state can lead to serious penalties.
Check with your accountant or attorney to see which filings apply to your business and when they are due.
6. Pay your income tax
One big shock for many who start a business is how much they owe in taxes.
When you received a paycheck, you probably did not focus much on the fact that your employer withholds federal and state income taxes and FICA and Medicare taxes.
More importantly, you never had a chance to spend what was withheld. However, when you run your own business, you have full access to the pre-tax income, so you have to diligently allocate funds ahead of time so that you don't come up short at text time.
To avoid owing interest on the taxes due, you make estimated tax payments each quarter to the IRS and state. Check with your accountant or attorney for payment vouchers and due dates.
7. Pay the self-employment tax
When you become self-employed, you are responsible for both the employee and employer amounts. This tax is based on your net self-employment income from Schedule C or the K-1 from your S corporation or LLC, and is calculated and reported on your federal form 1040.
A lot to remember, right? Maybe, but knowing and planning ahead is far better than trying to scrape together money in April to cover taxes you did not expect. Good luck with your new business!
Most Read IRIS Articles of the Week: Feb 19-23
Here’s a look at the Top 11 Most Viewed Articles of the Week on IRIS.xyz, Feb 19-23, 2018
Click the headline to read the full article. Enjoy!
I’d like to introduce you to Peggy. Born in 1956, Peggy will be 62 in 2018. She has worked in retail her whole life, the past twenty-five years spent in management. Peggy divorced from her husband 14 years ago, is still single and has no children. — Dana Anspach
This week the markets shrugged off last week’s fears and went back to the slow and steady melt up, despite economic news that looked likely to once again rock the boat. — Lenore Elle Hawkins
Themes established in 2017 across a wide range of markets and factors continued to resonate through the fourth quarter. Economic growth was strong and supportive of equity markets across the globe, a range of volatility measures reached all-time lows, and business and consumer sentiment remained elevated. — Yazann Romahi and Garrett Norman
Advisors and investors that feel they are hearing more and more about commodities and the corresponding exchange traded products in recent months are right. That is a natural result of dollar weakness and yes, the greenback is floundering again in 2018. — Tom Lydon
As the industry works to cope with new regulation, wades through an outpouring of new products, learns to satisfy investors’ shifting priorities and manages the active-passive debate, the viability of business units will be questioned, and at times radical measures will be taken. — Peter Hopkins
My hope is that this article points out some opportunities for you to make more money and serve your clients at a higher level and that you decide to do something about it. — Bill Bachrach
Whether the market is flying high or taunting your emotions with new lows and some bumpy volatility, here are four things every investor should keep in mind ... — Lauren Klein
Why financial advisors NEED to understand much more clearly the power of good digital market. With tools like AdvisorStream, it’s easier than ever to get the content you need to drive leads and referrals today! — Kirk Lowe and Matt Halloran
How do some firms and ideas go from nowhere to everywhere in a few short months? All of a sudden a restaurant becomes popular, a gas station gains a cult following, or a Broadway show becomes too popular to get a ticket for years. — Maribeth Kuzmeski
"Worldwide, $27.4 billion poured into fintech startups in 2017, Accenture reports, up 18% from 2016. With so much in play, it’s not surprising that 22 companies are new on this, the third edition of our list." — Chris Skinner
Many sensational headlines have been written the past few weeks about market declines, but two things have increased for sure: the viewership and the ad revenues of financial media organizations — Preston McSwain
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