Three things to know about taxes and starting a business

Choose a business structure

When starting a business, an owner must decide what type of entity it will be. This type determines which tax forms a business needs to file. The most common forms of businesses are:

  • Sole Proprietorship

  • Partnership

  • Corporation

  • S Corporation

  • Limited Liability Company

You can find a comparison of many of the details of business structures here.

Determine business tax responsibilities

 

The type of business someone operates determines what taxes they need to pay and how to pay them. There are the five general types of business taxes.

 

Income tax – All businesses except partnerships must file an annual income tax return. They must pay income tax as they earn or receive income during the year.

Estimated taxes – If the amount of income tax withheld from a taxpayer’s salary or pension is not enough, or if the taxpayer receives income such as interest, dividends, alimony, self-employment income, capital gains, prizes and awards, they may have to make estimated tax payments.

 

Self-employment tax – This is Social Security and Medicare tax. It applies primarily to to the income earned by individuals who are self-employed such as sole proprietors, partners in a partnership and owners of LLCs. Also read Taxes self-employed people pay

Employment taxes (also referred to as payroll taxes) – These are taxes an employer pays or sends to the IRS for its employees. These include unemployment tax, income tax withholding, Social Security, and Medicare taxes. Also read Payroll taxes seem complicated

 

Excise tax – These taxes apply to businesses that manufacture or sell certain products, operate certain kinds of businesses, use various kinds of equipment, facilities, or products, or engage in wagering. If you think your business might be affected, you can read more here

 

New Mexico gross receipts tax. Overlooking this tax can have costly consequences. Find more information here. Also consider attending my Essential Gross Receipts Tax Workshop.

Set up recordkeeping and bookkeeping systems

Being organized helps businesses owners use their time efficiently and effectively so that they can devote their time to other tasks.  Recordkeeping refers to the documentation required to prove your income and business deductions. It's important to organize source documents so that they are available when needed. You use a bookkeeping system to categorize the amounts of income and deductions that are necessary for preparing your tax returns. A good bookkeeping system will also give you the ability to prepare financial statements, particularly an income statement, so you can monitor progress toward your goals.

 

Also read What to know about recordkeeping.