Whether you’re a tax professional helping a client set up a new business or you’re a new business owner trying to navigate business taxes on your own, the task is always easier if you start with the basics. To help you avoid the overwhelm and focus on practical steps, here are five basic tax tips to get your business off to the right start.
Choose the business structure that’s best for you
As you start out, you’ll need to choose the structure of your business. The five most common business structures are sole proprietorships, partnerships, corporations, S corporations, and Limited Liability Companies (LLC).
The Small Business Administration’s guide to Choosing a Business Structure can help you determine which structure is the most beneficial for you. Once you’ve chosen your business structure, you’ll report your business activity using the IRS forms for your specific business type.
Learn which types of business taxes you’ll need to pay
A major key to success is to know about your federal tax obligations as soon as you start your business. There are five general types of business taxes: income tax, self-employment tax, employment tax, excise tax, and estimated taxes. The type of taxes your business pays usually depends on the type of business you choose to set up. Nearly all businesses will file an income tax return, except for partnerships which will file a similar information return. Most sole proprietorships and single-member LLCs will be subject to the self-employment tax, and if you have employees, you’ll pay the employment tax. The excise tax is less common and only applies to certain businesses.
Estimated taxes are not actually a separate tax. It’s more accurate to think about them as the income taxes and self-employment taxes you are required to pay throughout the year (usually once per quarter) in order to avoid an underpayment penalty at the end of the year.
Get your employer identification number
You may need to get an Employer Identification Number (EIN) – sometimes also called a business tax ID number – for federal tax purposes. In other cases, your Social Security number can serve as your EIN. The IRS’s simple “Do You Need an EIN?” questionnaire will help you determine whether or not you should apply for an EIN. Generally, if you have employees or operate as a corporation or partnership, you’ll need an EIN. If you operate as a sole proprietorship or single-member LLC, you can likely choose to use your Social Security Number as your EIN.
Choose an accounting method
An accounting method is a set of rules that determine when and how to report income and expenses. The IRS recognizes the cash method, accrual method, and hybrid method as valid methods of reporting. The two that are most common are the cash method and the accrual method. Under the cash method, you recognize income and expenses as soon as you receive them.
Under the accrual method, you report income and expenses as you incur them, even if you don’t actually receive the money or pay for the expenses until months later. This is true even if you receive the income or pay the expenses in a future year. For example, if you sent an invoice in November of one year but didn’t receive payment until the following January, that income would still be recognized under the prior year.
You can read more on the pros and cons of each accounting method here to determine which is right for you.
Learn about common business deductions and credits
Knowing about some of the common business tax credits and deductions can help you plan for your taxes throughout the year. These are two of the most common and impactful:
The Small Business Health Care Tax Credit
If you offer health benefits to your employees, you could qualify for significant tax savings or a much larger tax refund through the Small Business Health Care Tax Credit. This credit helps small businesses and tax-exempt organizations pay for the health care coverage they offer their employees. A small employer is eligible for the credit if it has fewer than 25 employees who work full-time, or a combination of full-time and part-time. The maximum credit is 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers, such as charities.
Employers with a certain number of employees (generally 50 full-time employees or a combination of full-time and part-time employees that is equivalent to 50 full-time employees) will be subject to the Employer Shared Responsibility provision.
The Qualified Business Income Deduction
The QBID allows most small businesses to deduct up to 20% of their business income. You can learn more in our three-part series: How the QBI Deduction is Calculated, How a Specified Service Trade Can Impact QBID, and Information on Qualified Business Income Deduction.
Thankfully, the TaxSlayer Pro software calculates most major business tax credits and deductions for you, making tax filing dramatically easier. And for the latest tax updates for businesses, our guide to the New Tax Law Changes for 2021 will get you up-to-date.
This article was last updated on February 6, 2022.