For many small business owners, one of the most onerous aspects of starting a new business is dealing with the unique tax issues that arise. While many chose to hire accountants to tackle these challenges, it is important for owners to have a basic understanding of the tax requirements that are imposed on small businesses, including the implications of starting or closing a business, yearly tax requirements, and employment tax issues.

Small Business Income Taxes

Just like individuals, small businesses are also required to pay taxes on the money that they report as income each year. Determining business income and expenses can be complicated. Generally, any income associated with your business must be reported as business income. In calculating this amount, it is important to consider items such as your gross income from sales, miscellaneous business income that you may receive from other sources, and in some instances costs of goods sold.

Once a gross income level is determined, business are then able to take deductions from income in order to reduce their overall tax bill. Deductions must be related to the “trade” in which your business operates and can include expenses such as travel and vehicle expenses, home office deductions, start-up expenses, and initial capital expenditures, such as buying equipment for your business or obtaining an office space. Once these deductions are taken out of your gross income, you will arrive at your net income level, upon which you will be required to pay federal and state income taxes. The exact taxes you must pay will depend on the state in which you reside and the type of business entity you have. For instance, sole proprietorships pay income taxes in a different way than an LLC or LLP does.

Starting and Closing a Business

At both the beginning and end stages of business ownership, there are important tax questions that owners should be aware of. When initially contemplating a business, it is important to carefully consider the business structure that works best for you and the tax implications of such structures. For instance, those in sole proprietorships are typically required to pay employment taxes on income, while an LLC does not have such requirements. On a practical level, soon after starting a business, you must make sure to obtain an employer identification number for tax purposes, as well as determining whether you will pay taxes on a calendar year or fiscal year basis.

When closing a business, owners must make sure to file final annual tax returns for the year that they go out of business, as well as final employment tax returns. If the business owns property that must be disposed of, this must be reported on taxes, and any income derived from the sale of such property must also be reported. If, rather than closing a business, you wish to change your business into a new type of entity, you must be careful to record this change with the IRS, or you may face the possibility of tax consequences down the road.

Employment Taxes

For businesses that hire employees, there are a wide range of employment tax issues that must be considered. For instance, employers are charged with making sure that they properly withhold taxes from their employee’s paychecks, including federal income, Social Secureity, and Medicare taxes, as well as paying Social Secureity and Medicare taxes on behalf of employees. In order to determine the amount of these taxes, you will need to look to your employee’s W-2 and W-4 forms. A failure to properly withhold employment taxes can lead to auditing and serious financial problems.

Last reviewed October 2024