IRS’s Top Seven Tax Tips for Starting a New Business

Anyone starting or thinking of starting a new business should be aware of their federal tax responsibilities. Here are the top seven things the IRS wants you to know if you plan on opening a new business this year.

1.    First, you must decide what type of business entity you are going to establish. The type your business takes will determine which tax form you have to file. The most common types of business are the sole proprietorship, partnership, corporation and S corporation.

2.    The type of business you operate determines what taxes you must pay and how you pay them. The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax.

3.    An Employer Identification Number is used to identify a business entity. Generally, businesses need an EIN. Visit IRS.gov for more information about whether you will need an EIN. You can also apply for an EIN online at IRS.gov.

4.    Good records will help you ensure successful operation of your new business. You may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for federal tax purposes.

5.    Every business taxpayer must figure taxable income on an annual accounting period called a tax year. The calendar year and the fiscal year are the most common tax years used.

6.    Each taxpayer must also use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and an accrual method. Under the cash method, you generally report income in the tax year you receive it and deduct expenses in the tax year you pay them. Under an accrual method, you generally report income in the tax year you earn it and deduct expenses in the tax year you incur them.

7.    Visit the Business section of IRS.gov for resources to assist entrepreneurs with starting and operating a new business.

To get the latest IRS news and products and services, subscribe to e-News for Small Businesses on IRS.gov at http://www.irs.gov/businesses/small/article/0,,id=154825,00.html, click “Subscribe Now” at the bottom of the page and enter your e-mail address.

The IRS Small Business and Self-employed Tax Center at http://www.irs.gov/businesses/small/index.html has more information about starting and operating a new business.

4 Tips on avoiding an audit

Are you paying enough in taxes? Most small business owners would say they already pay plenty.  But the IRS disagrees.  The agency calculates the “tax gap”—that is, what it expects to collect and what taxpayers actually fork over—at more than15 percent of total taxes due.

Personal income from business activities—rather than wages or investments—is the single greatest source of this discrepancy, according to the IRS, accounting for between $83 billion and $99 billion of missing tax dollars.  That’s why the agency directs the  greatest share of its enforcement budget—41 percent in 2006—toward small businesses, almost as much as it devotes to corporations, high-income individuals, and criminal activity combined.

Since the IRS already sees the bulk of small business owners—those with businesses structured as sole proprietorships,  LLCs,  partnerships, and S-Corps—as a greater risk of misreported income compared with individuals or large corporations,  you need to be careful to avoid cutting any corners that could trip you up during an audit.

The comments above and these 4 tips are from a list of 25 Tips, provided in a Business Week article.

1. Classify workers properly

Are your workers employees or independent contractors?  If you classify workers as  independent contractors and don’t contribute the employer’s share of their payroll taxes, make sure they truly meet the IRS’s definition.

It has less to do with how many hours they work and more to do with how much control you exercise over them.

2. File and pay on time

It sounds obvious, but if you don’t pay your taxes or file for an extension by Apr. 15, the IRS can file a substitute return for you, collect the money from your bank accounts, or get a tax lien against your property.

3. Pay estimated taxes

Since taxes aren’t withheld from your business income as they are from W-2 wages, you have to pay the IRS estimated taxes four times a year.  While some business owners may not owe estimated taxes—sole proprietors who expect to owe less than $1,000 for the year, for example—failing to pay them could leave you on the hook for a penalty come April.

4.  Keep careful records

Don’t stuff all your receipts and invoices in a desk drawer.  Make sure you have records to back up your sources of income and expenses. The burden is on the taxpayer to prove a deduction is a legitimate business expense, so you should have receipts to show an auditor that your write-offs are above board.

Information on Accounting, Taxes and Risk Management is available in a SCORE Chicago workshop on July 17th.  Registration information is at: http://bit.ly/AccountingRisk

Special thanks to Irv Williamson, who will be presenting this workshop.

Choose Accounting Services Carefully

As you launch or expand a business, keeping track of the money, preparing tax returns and performing other financial tasks can quickly become a burden. If you need more time to do other things, it might make sense to turn over tax, accounting and other financial chores to outside specialists.

Choosing the right type of tax, accounting, bookkeeping or other financial help is an important decision. An outside accountant can be one of your most trusted business advisors and a key to your success. Although many business owners work with big national firms, most prefer to work with small independent firms or solo accounting professionals.

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