As a new business owner you need to know your federal tax responsibilities. This page provides links to basic federal tax information for people who are starting a business. It also provides useful information for making basic business decisions. The list should not be construed as all-inclusive. Other steps may be appropriate for your specific type of business.
Determine if it is a business or a hobby: For your activity to be considered a business rather than a hobby, your business must be profitable during at least three of the last five tax years, including the current year.
Select a business structure: When beginning a business, you must decide what type of business entity to establish. There are many legal and tax implications you will want to consider before choosing a business entity and it is recommended that you speak with a business lawyer before legal formation of your company. Among other things, your business entity will determine the amount you have to pay in taxes and which income tax return form you have to file. The most common forms of business are the sole proprietorship, partnership, corporation, limited liability company (LLC), and S corporation. (See our earlier post, “An Overview of Basic Business Structures" to learn more).
Get an Employer Identification Number (EIN): An Employer Identification Number (EIN) is also known as a Federal Tax Identification Number, and is used to identify a business entity.
Establish records: Good records will help you monitor the progress of your business, prepare your financial statements, identify source of receipts, keep track of deductible expenses, prepare your tax returns, and support items reported on tax returns. The length of time you should keep a document depends on the action, expense, or event the document records. You will want to keep your records as long as they may be needed to prove the income or deductions on a tax return.
Choose a tax year: A “tax year” is an annual accounting period for keeping records and reporting income and expenses. The tax years you can use are a calendar year (January 1 through December 31) or a fiscal year (12 consecutive months ending on the last day of any month except December). Note: Sole proprietors must adopt a calendar tax year.
Select an accounting method: Each taxpayer (business or individual) must figure taxable income on an annual accounting period called a tax year. Each taxpayer must also use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and an accrual method. Under the cash method, you generally report income in the tax year you receive it and deduct expenses in the tax year you pay them. Under an accrual method, you generally report income in the tax year you earn it, regardless of when payment is received, and deduct expenses in the tax year you incur them, regardless of when payment is made.
Pay your business taxes: The form of business you operate determines what taxes you must pay and how you pay them. The following are the four general types of business taxes; income tax, self-employment tax, employment taxes, and excise tax. In addition to federal taxes you will also have state and/or local taxes.
IRS Resources for Small Businesses
The IRS offers extensive publications and training that are easy to understand and very helpful. You will find a list of topics at http://www.irs.gov/businesses/small/index.html.
For easy tutorials, click on Videos & Other Educational Products, and you will find these resources:
IRS Video Portal - http://www.irsvideos.gov/
This site provides short videos presentations dedicated to helping your small business.
Small Business Products Online Ordering - http://www.irs.gov/businesses/small/article/0,,id=101169,00.html
Looking for a tool to help you meet your tax requirements? This link provides free products, developed especially for the small businesses and self-employed individuals.
IRS Live - http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/IRS-Live
IRS Live is for the tax pro in the know. A live webinar, IRS Live is a panel discussion among IRS experts and industry professionals aimed at educating tax professionals on the most current and complex tax issues affecting them and their clients.
Tax Scams - How to Recognize and Avoid Them - http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Tax-Scams-How-to-Report-Them
To help the public recognize and avoid abusive tax schemes, the IRS offers an abundance of educational materials. Participating in an illegal scheme to avoid paying taxes can result in imprisonment and fines, as well as the repayment of taxes owed with penalties and interest. Education is the best way to avoid the pitfalls of these “too good to be true” tax scams.
SBA's Small Business Training Network - http://www.sba.gov/training/
This site is a virtual campus housing free training courses, workshops and knowledge resources designed to assist entrepreneurs and other students of enterprise.
SBA Offers Spanish Online Classes - http://www.sba.gov/espanol/
The U.S. Small Business Administration offers an interactive online course for Spanish-speaking entrepreneurs on its Spanish language website.
Understanding Taxes - http://www.irs.gov/app/understandingTaxes/index.jsp
The Understanding Taxes (UT) program features over 1,100 pages of content designed to make learning taxes interactive, relevant, and educational. Understanding taxes makes real world connections to classroom instruction. It is a great resource for high schools, community colleges, and the general public for learning more about the history, theory, and application of taxes in the United States.
Link and Learn Taxes - http://www.irs.gov/app/vita/index.jsp
This web-based program is the core curriculum through which IRS Partners and Volunteers are given quality baseline training in tax return preparation. This fun, interactive course teaches you the basics to accurately prepare income tax returns for individuals and obtain your volunteer certification along the way-at your own pace!
SBTV.com - http://www.sbtv.com
SBTV is a television network on the Internet devoted exclusively to providing engaging streaming video content to small businesses. It provides technical information on how to run your business, inspirational stories from entrepreneurs across the country, information about small business conferences and events, and resources to help solve day-to-day business challenges.
Small Business Taxes: The Virtual Workshop - http://www.irsvideos.gov/SmallBusinessTaxpayer/virtualworkshop
Topics include what you need to know about federal taxes and your new business, how to set up and run your business so paying taxes isn't a hassle, federal unemployment taxes, and much more.