Starting a new business is an exciting venture, but it also comes with numerous responsibilities, including understanding and complying with tax laws. Failure to address tax obligations can lead to significant financial penalties and legal issues. This blog post will discuss some of the most important tax issues for new businesses to consider.

1. Business Structure

The choice of business structure (sole proprietorship, partnership, LLC, or corporation) can have a significant impact on your tax liability. The three most common types are the C-corp, S-corp and LLC. Each structure has its own set of tax rules and regulations. It's essential to consult with a tax professional to determine the best structure for your business.

2. Tax Registration

Once you've chosen your business structure, you'll need to register for various taxes, including:

• Federal Income Tax: If you're a sole proprietor or partnership, you'll report business income and losses on your personal tax return. Corporations file their own corporate tax returns.
• Self-Employment Tax: Sole proprietors and partners are subject to self-employment tax, which includes Social Security and Medicare taxes.
• Payroll Taxes: If you have employees, you'll need to withhold federal, state, and local income taxes, as well as Social Security and Medicare taxes, from their paychecks.
• Sales Tax: If your business sells tangible goods or services within a state with a sales tax, you'll need to collect and remit sales tax to the state government.

3. Estimated Taxes

If you're a sole proprietor or partner, you may need to make quarterly estimated tax payments to avoid penalties. Estimated taxes are based on your expected income for the year.

4. Record Keeping

Accurate and organized record keeping is essential for tax compliance. Keep detailed records of all income, expenses, and transactions.

5. Deductions and Credits

There are numerous tax deductions and credits available to small businesses. Understanding and claiming these deductions can help reduce your tax liability. Some common deductions include:

• Business expenses: Rent, utilities, supplies, and employee salaries.
• Depreciation: Deductions for the cost of business assets over their useful life.
• Section 179 deduction: Allows businesses to deduct the full cost of certain qualifying equipment in the year it is purchased.

6. Payroll Taxes

If you have employees, you'll need to withhold federal, state, and local income taxes, as well as Social Security and Medicare taxes, from their paychecks. You'll also be responsible for paying the employer portion of these taxes.

7. Tax Planning

Proactive tax planning can help you minimize your tax liability and maximize your business's profitability. Consider consulting with a tax professional to develop a tailored tax strategy.

8. Employee/Contractor Issues

Many startups prefer to utilize independent contractors over full-time employees to avoid paying Social Security, Medicare, unemployment and providing health insurance. It makes sense, especially when your budgets aren’t quite there yet.  However, it is tax critical to make the proper distinction between the two.

The IRS pays close attention. Depending on the level of control an employer has over an independent contractor, the IRS can claim it as a misfiling, which would mean trouble for you and your company.  Check out IRS publication 15-A for a guide on this distinction and remember to file W-2’s for employees and 1099s for contractors.

Understanding and complying with tax laws is crucial for the success of your small business. By addressing the tax issues outlined in this blog post and seeking professional guidance, you can ensure that your business is in compliance and minimizing its tax burden.