Four Tax Facts You Should Know Before Starting a Business

There is more to income taxes as a business owner than you might think. Many business owners do not realize that filing personal income taxes is required, which can get them into deep financial trouble. Below are a few facts which will help you start your new business.

Business Type Determines Tax Liability

Choose how you classify your business carefully as it will determine the tax burden for your new business. S corporations, for example, pay taxes at shareholder levels. There cannot be more than 100 shareholders for a single stock.

Startup Expense Deductions

Once your business is up and running, you may be able to deduct some of your startup costs. Small businesses do have expenses which can be deducted before the first day of business. Costs accumulated prior to opening can be deducted.

Estimated Payments Are Required

If you do not file all of the taxes that you owe, penalties can be placed on you. Use the previous tax year’s income, including credits and deductions, to calculate estimated tax burdens. Startups are typically tax exempt in their first year.

Self-Employment Tax Payments Are Required

When you earn money but no one takes out withholdings for Medicare and social security, you are self-employed and are responsible for paying those taxes out-of-pocket. The downside to self-employment taxes is that you pay 1.5 times what a traditionally employed person does.

In Conclusion

With a better understanding of taxes for new business owners, you should be able to start planning ahead. Using some of your personal profits to save for self-employment taxes can help take some of the stress off of you.

Image credit: Christophe BENOIT