Those thinking of starting a business or who have recently opened should know federal tax responsibilities. The IRS offers five tips for new business-owners to follow.
•Type of business. Early on, decide the type of business to establish. The most common types are sole proprietorship, partnership, corporation, S corporation and Limited Liability Company. Each type reports its business activity on a different federal tax form.
•Types of taxes. The type of business run usually determines the type of taxes paid. The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax.
•Employer Identification Number. A business often needs to get a federal EIN for tax purposes. EINs can be applied for online at IRS.gov.
•Record keeping. Keeping good records will help when it’s time to file business tax forms at the end of the year. They help track deductible expenses and support all the items reported on tax returns. Good records will also help monitor a business’ progress and prepare financial statements. Choose any record keeping system that clearly shows income and expenses.
•Accounting method. Each taxpayer must also use a consistent accounting method, which is a set of rules that determine when to report income and expenses. The most common are the cash method and accrual method. Under the cash method, report income in the year it is received and deduct expenses in the year paid. Under the accrual method, report income in the year earned and deduct expenses in the year incurred. This is true even if a business owner receives the income or pays the expenses in a future year.
For more information, see the Business Taxes page at IRS.gov. The site also offers Publication 583, Starting a Business and Keeping Records at the website or by calling 800-829-3676.