Startups and Taxes: 10 Things To Know

startups and taxes

There’s no doubt that starting a business is one of the most exciting times in an entrepreneur’s life. But it doesn’t come without its own set of challenges. One of those challenges is figuring out how to file your tax returns properly as a startup.  

Fortunately, the IRS has created an online portal where you can file and make payments electronically. This free service allows entrepreneurs to track their business progress effortlessly throughout the year. It provides detailed instructions to complete each section of the return.  

However, there are still some key tax considerations that you need to be aware of when starting up a business. Here are ten essential matters regarding taxes for startups:  

1. Tax Exemptions

The IRS offers state tax exemptions for certain types of businesses. These include charities and nonprofits. 

If your startup business qualifies for this tax exemption, you don’t have to pay any federal income taxes on profits earned by your company. However, if your company earnings exceed a certain threshold annually, you will have to pay federal income taxes on all earnings above that threshold.

If you plan to operate a nonprofit, check with the IRS to see if you qualify for tax exemptions. You may also want to seek help with 501c3 filing by consulting with a local attorney specializing in taxation to ensure that you don’t run afoul of any laws. 

2. Your Business Structure

Choosing a structure is one of the most critical decisions you will make as you start your business. There are three main types of this:  

  • Sole Proprietorship: You’re personally responsible for all the company’s financial obligations. You also have unlimited liability for any debts or lawsuits against the company.
  • Partnership: It’s like a sole proprietorship but requires at least one or more partners. Partners share responsibility for the company’s liabilities. They also split ownership of the company equally between them.  
  • Corporation: The corporation is a legal entity separate from its shareholders. Shareholders aren’t liable for the company’s debts or lawsuits. Instead, they only receive dividends based on the company’s profits.

When choosing which business structure to use, consider what risk you’re willing to take. Sole proprietorships are easy to form but require more work than other structures. Corporations are much harder to create but offer more protection for investors.

3. Payroll Taxes

As an owner/employer, you must withhold payroll taxes from employees’ wages, including Social Security and Medicare taxes. 

Deduct these taxes from employee paychecks before remitting them to the government. In addition, you must collect social security contributions from your employees. If you fail to do so, you could face penalties. 

Employers must also provide workers with W-2 forms. This document shows how much money each employee has been paid and what deductions were made.  

The IRS offers several resources to help small businesses learn more about payroll taxes. Payroll software can also help you manage payroll efficiently.

4. Tax Deductions

A startup business owner can claim many kinds of expenses or tax deductions. These range from office supplies to travel costs.  

To determine deductibles, they need to meet these three criteria:

  • It must be related to running your business.  
  • It must be necessary for your business. 
  • It cannot be personal.  

For example, you cannot deduct the cost of a vacation unless you’re traveling away from home to conduct your business. 

However, you can deduct the cost of buying new equipment used exclusively for your business.

5. Excise Taxes

Some states impose excise taxes on specific products and services, such as gasoline, cigarette, indoor tanning, etc. You need to collect these taxes from customers at checkout.  

You can also charge customers a fee to cover the cost of collecting these taxes. However, if you don’t gather enough of these fees, you could owe back taxes.  This is a key decision to review relevant for all startups and taxes.

6. Estimated Taxes

Estimated taxes are payments that you make toward future taxes. They can be calculated based on previous years’ earnings. 

These payments are usually required once per quarter. The amount depends on your total income during the past quarter. Depending on your situation, you might not have to pay estimated taxes until next year’s quarterly returns are filed. 

7. Keeping Records

One of the best ways to avoid paying back taxes is to keep accurate records, including keeping track of your income and expenses. After all, you don't want to end up with tax debt.

You can use tools like spreadsheets or accounting software to organize this information. If you choose to use paper, you may want to set up a system where you write down transactions as soon as you complete them. You can then transfer those notes to your computer when you get home. 

startups and taxes

8. Tax Days

Taxes due dates vary by type of tax. Some are due every April 15th, while others are due throughout the year. Other taxes will be due earlier or later, depending on your business type. For instance, partnerships and LLCs have their own tax filing deadlines. To find out when yours are due, visit the IRS website.

9. Filing Taxes

Another key area for compliance for startups and taxes is filing them! Once you finish computing all of your taxes, it's time to file them. You can do this online or through regular postal mail. There are two main methods of filing taxes: you can either prepare your return yourself or hire accounting services to do it for you.   

  • DIY

If you plan to do it yourself, you should first gather all of your receipts and other documents. Then, create a spreadsheet with columns for each type of tax you’re filing. 

Next, add up your totals for each column. Finally, enter the numbers into your tax form.

  • Hire Accounting Services

On the other hand, if you choose to hire someone to do it for you, you’ll need to provide them with the same documents. They will then calculate your taxes and send you a copy of your return.  

10. Payments And Refunds

After filing your taxes, you need to pay any outstanding amounts. It means sending money to the appropriate government agencies. 

Lastly, refunds are payments made to taxpayers who overpaid their taxes. If you paid too much in taxes, you’d receive a refund check. Your refund will be sent directly to your bank account. If you owe more than you received, you’ll need to send payment to the government.

Final Thoughts

Starting a business takes courage. But once you’ve done it, you’ll quickly realize that being your own boss comes with its perks. Now that you know some of the basics behind startups and taxes, starting your own business and managing its taxes, you can carry on your business duties. You’ll quickly realize just how rewarding entrepreneurship can be.

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