If you plan to start a new business, or if you’ve just opened your doors, it’s important for you to know your federal tax responsibilities. Here are five basic tips from the IRS that can help you get started:
1. Type of business — Early on, you will need to decide the type of business you are going to establish. The most common types are sole proprietorship, partnership, corporation, S corporation and Limited Liability Company. Each type reports its business activity on a different federal tax form.
2. Type of taxes — The type of business you run usually determines the type of taxes you pay. Th four general types of business taxes are income tax, self-employment tax, employment tax and excise tax.
3. Employer Identification Number — Oftentimes, a business needs to use a federal EIN for tax purposes. Check IRS.gov to find out if you are required to obtain and use an EIN. If you do, you can apply for an EIN online.
4. Accounting method — Each taxpayer must also use a consistent accounting method, which is a set of rules that determine when to report income and expenses. The most common are the cash method and the accrual method of accounting. Under the cash method, you typically report income in the year that you receive it and deduct expenses in the year that you pay them. Under the accrual method, you typically report income in the year that you earn it and deduct expenses in the year that you incur them. This is true even if you receive the income or pay the expenses in a future year.
Each state has additional requirements for starting and operating a business. For information regarding state-level requirements for starting a business, please refer to your state’s Web site.
For more information, check out the Small Business and Self-Employment Tax Center page on IRS.gov. From there, review the special section on Starting, Operating, or Closing a Business. Publication 583, Starting a Business and Keeping Records, may also help new business owners with the tax aspects of running a business. The booklet is also available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).
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