Penelope Gaines: Startup Tax Help

It is
vitally important to understand your tax obligations when starting a small
business, including effective record-keeping and deductions. We’ve talked about helping startups here, here, here, and here.

Federal Business Taxes: Introduction

A new
business should be prepared for the kinds of taxes that they will be required
to pay. There are four general kinds of federal taxes relating to business:

Income Tax – Income taxes may be charged to
businesses organized as corporations or limited liability companies
(LLCs), while other businesses are taxed through the income of the
principal owner. Business income tax is paid as-you-go; usually paid on
income earned during the year. Employees, by comparison, typically have
their taxes withheld from their pay. Businesses must frequently make
periodic estimated tax payments throughout the year.
Employment Tax – Businesses with employees must
pay certain employment taxes including Social Security, Medicare, federal
income tax withholding, and federal unemployment tax.
Self-Employment
Tax – Self-employment
tax is payment into the Social Security and Medicare programs by an
individual that works for themselves.
Excise Tax – Businesses pay an excise tax
when they purchase specific goods, such as gasoline. Excise taxes are
often included in the price of the good sold, but there are also excise
taxes on some activities, such as wagering or highway usage by trucks.

State and Local Taxes: Introduction

In
addition to federal tax obligations a new business should be aware of state and
local tax obligations. These obligations may vary greatly between states or
cities and it is critical that you investigate or contact local authorities to
determine your obligations early in the process of forming a business. Typical
obligations include payment of the following:

State Income Tax
– All businesses pay state income
taxes. As with federal taxes some business pay taxes on their own behalf,
while other businesses may be taxed through the income of the principal
owner(s).
State Employment
Tax – Employers may be required to
withhold a portion of their employees’ earnings and pay them toward their
income tax, unemployment tax, and state workers’ compensation insurance
programs. Employers may additionally be responsible for retaining the
business’ payroll and employment tax records for a certain number of
years.
Local Tax – Small business owners may also be
required to pay certain taxes to their city or county. Common local taxes
include operating taxes, property tax, sales tax, and in some larger
cities a separate income tax.

Taxes: The Importance of Record-Keeping

Apart
from the legal obligations a business may have to maintain accurate records
there are a number of reasons a shrewd businessperson will want to keep
comprehensive records. Financial records can help you monitor your business’s
progress. Profit can be difficult to determine without a clear record of income
and expenses. Accurate records can also help determine which business
activities are producing the largest profits for your business, allowing you to
direct your energy and assets to those activities that give the highest return.

Accurate
records can assist in the preparation of financial statements for use in tax
filings or to apply for a loan or credit on behalf of the business. Maintaining
record of the source of receipts can help ensure that proper deductions are
claimed and deductions questioned by a tax authority have the appropriate
support. Comprehensive records assist with the preparation of tax returns and
provide a defense against any suspicion of wrongdoing.