What Small Businesses Need To Know About Tax
You're running a small business and probably wish you could spend all your time on product development, sales and marketing. But you also have to keep on top of your taxes.
To start with, small businesses are required to pay taxes on the money they report as income each year. This can be complicated, as you're often dealing with both federal and state taxes. Also, the form of your business can affect your tax situation: Are you running a C corporation? An S corporation? An LLC? A sole proprietorship?
Sales tax is another potentially complex area. Each state that has a sales tax has its own rules, and often, jurisdictions within a given state have different rates. Business owners not only have to know the relevant rules but also properly collect and remit the right amounts to the appropriate agencies.
Fortunately, you can balance your tax obligations with deductions you may be entitled to, such as travel and vehicle expenses, home office deductions and startup expenses. There are limits here, however, so you will need to examine the rules closely.
If you have employees, you have to address a wide range of employment tax issues. Employers are charged with making sure they properly withhold taxes from employees' paychecks, including federal income, Social Security and Medicare taxes. You also have to pay Social Security and Medicare taxes on behalf of employees. Again, there may be state deductions as well. This can get you into the whole classification morass: Are your employees truly employees or are they independent contractors? Failure to properly classify can lead to serious financial and legal problems.
You may have to pay a franchise tax to your state, depending on the type of business it is. And then there's successor liability — if you bought the business or a stock of goods, you may become responsible for the seller's unpaid taxes, interest and penalties up to the purchase price of the business or stock of goods. This could be an unexpected expense if it is not on your radar.
Poor record-keeping can create problems if you're audited — you won't be able to defend your deductions if you haven't kept receipts. Some underpayment is inadvertent and generally due to the complexity of the tax code. It may seem expensive to retain tax help, but you probably don't have the expertise to do it effectively on your own.
Hire a professional to make sure you follow all the regulations to the letter. Keep excruciatingly precise records. Keep receipts for all deductions that typically require additional substantiation. Save all tax files and workbooks, as well as everything you used to calculate those taxes — some say for at least four years while others say for 12 years.
Fill out all paperwork and submit it and the payments on time and in full. Keep tax collected from customers in a separate account so it will be easy to retrieve. Any questions as you proceed? Be sure to consult with a professional.