Few things are more rewarding than starting your own small business. Before you open your door or go live online, you have numerous decisions to make that will affect the future success of your business. Some of those decisions will have a profound effect on what your federal taxes will look like.
The time to think about your future tax liabilities as a small business owner is now. Aiming to reduce taxable income and maximize deductions could require some strategic decisions. It may help to consider the following so that you can reduce your tax liability going forward.
Choice of business entity
The type of business entity you choose greatly affects how the IRS will assess taxes on your business. The tax structure will differ if you function as a sole proprietorship, an S corporation or a limited liability company. Having an understanding of how each entity pays taxes could help make your decision.
You must pay your own taxes
You may be thinking that you already know you have to pay the taxes yourself. However, did you consider that you must pay self-employment taxes? When you worked for an employer, it paid for half of your Social Security and Medicare taxes. Now you have to pay them for yourself.
The IRS expects quarterly estimated payments from your business
With the exception of your first year in operation, the IRS expects you to pay quarterly estimated payments on behalf of your business. These payments are meant to cover as much of your tax liability as possible. If you plan to make more than $1,000 a year, you may want to prepare to make these payments; of course, you want to make more money than that. Otherwise, you could end up paying penalties along with your tax bill.
Can you really deduct that?
You may know you can deduct rent, equipment and furniture. What you may not know is that you may take other deductions that may not be readily identifiable. It may take some research in order to find all of the deductions to which you are entitled. However, the effort may pay off in reducing your tax liability.
In addition, you may not know that you can deduct at least some of the expenses associated with starting your business. You may even be able to deduct any market analyses or research you conducted, any training you provided for employees or that industry seminar you took. These deductions may just be the tip of the iceberg. You may also need the same analysis regarding the payment of any California taxes as well.
Because the federal tax code can be quite complex and frustrating to understand, you might benefit from obtaining some guidance and advice regarding the income tax issues (and other taxation issues) you will encounter as you embark on your new venture.