While starting a new business is can be exhilarating and scary, there are tax requirements that need consideration to ensure tax reporting compliance and eligibility for the maximum number of credits and deductions. Following is a list of tax tips to consider when registering and structuring your new company.
Choose a Business Structure
The type of business selected when establishing a company determines which income tax return a business taxpayer needs to file with the IRS and state. The most common business structures are:
1. Sole proprietorship: this business type is an unincorporated business owned by an individual. There’s no distinction between the taxpayer and their business. This business entity does not require a separate tax return, as IRS form Schedule C, Profit or Loss from Business, is filed with your IRS Form 1040.
2. Partnership: this business type is an unincorporated business with ownership shared between two or more people. The business partners generally prepare and file a partnership agreement with the appropriate state agency.
3. Corporation: this business type, also known as a C corporation, is a separate entity owned by shareholders. Articles of Incorporation are filed with the appropriate state agency.
4. S Corporation: this business type, is a corporation that elects to pass corporate income, losses, deductions, and credits through to shareholders. Articles of Incorporation are filed with the appropriate state agency. IRS Form 2553, Election by a Small Business Corporation, is filed to change from a C corporation to an S corporation with the IRS.
5. Limited Liability Company: this is a business structure allowed by state statute which can be treated as a sole proprietorship if there is only one member or a partnership if two or more members. An LLC can also elect to be treated as either a corporation or S corporation for tax purposes. IRS Form 8832, Entity Classification Election, to elect status as a corporation or IRS Form 2553, Election by a Small Business Corporation, to elect status as an S corporation is filed with the IRS.
Select a Tax Reporting Year
The tax year is an annual accounting period for keeping records and reporting income and expenses to the IRS, shareholders, and others that the business is obligated to share this information with. The business owner must choose either:
1. Calendar year reporting: 12 consecutive months beginning January 1 and ending December 31.
2. Fiscal year reporting: 12 consecutive months ending on the last day of any month except December.
Apply for an Employer Identification Number (EIN)
An EIN is also called a federal tax identification number and is used to identify a business. Most businesses need an EIN if they have employees, issue 1099’s, pay excise or sales tax, or set up a deferred retirement program. It is important for a business with an EIN to keep the business mailing address, location and individuals responsible for the business up to date. IRS regulations require EIN holders to report changes in the responsible party within 60 days. They do this by completing IRS Form 8822-B, Change of Address or Responsible Party and mailing it to the address on the form.
Have all employees complete these forms:
1. IRS Form I-9, Employment Eligibility Verification U.S. Citizenship and Immigration Services
2. IRS Form W-4 Employee’s Withholding Allowance Certificate
3. Verify with the state of business filing any forms that may also need to be completed
Understanding business structures and tax reporting responsibilities when starting a business is vital to success. This list includes some of the items business owners need to consider when establishing a business. To learn more about business entity and tax filing considerations and requirements when starting a business, contact US Taxes, Inc. at firstname.lastname@example.org or 1-609-588-8181.