With two absolutes in life – death and taxes – you can try to hold off the grim reaper as long as possible, but you will never be able to hold the tax man back. The tax man cometh, whether your business is prepared or not. That is why, when starting any small business, you had better make sure that your accounting is in order so that your taxes can be filed and paid properly by the end of the year, or by April 15th to be more exact. That is the deadline by which the IRS says that your taxes had better be filed or else you will be penalized, fined or both. The following is a rundown of everything you need to know about accounting and taxes when starting a business so that you can become well-prepared come tax time.
What Taxes Do You Have to Pay as a Business Owner?
The most important thing to remember when it comes to accounting and taxes is that the government merely wants you to pay a percentage of all income earned. That is your duty for living and working in this country, and this means that accurate records should be taken for every sale your company makes, as well as full records on all expenses. Some of those expenses may be deductible from your overall taxable income, thus putting more money in your pocket by the end of the year. The amount you are actually taxed will be calculated by the income you have coming in, which usually comes from the sales of products or services.
Sales Taxes
Whether your company sells a product or provides a service, if you hope for your business to survive, you will somehow receive money from customers. This money will be taxed by the government and you will have to pay in at the end of the year (or quarterly if you decide) a certain amount of tax revenue for every dollar you earn. Before this can happen, you need to establish your business with the state.
Tax ID
Unless you are starting a sole proprietorship, in which case you will just use your personal social security number on future tax forms, you will need to establish your business with your state in order to obtain a valid tax ID. This is the ID that will allow you to collect money for your products and services, and it’s the ID you will use on all tax forms when filing your taxes before the big day.
Keeping Accurate Records
To make easy work of accounting and taxes when starting a business, you should have some way of recording your earnings and expenses right down to the dollars and cents. Many small business owners use accounting software, such as Quicken, and some merely record all of their earnings and expenses manually using a program like Excel or the Google Docs equivalent.
No matter how you go about keeping track of your cash flow, make sure it’s easy to locate and read. Not only will proper bookkeeping help you file your taxes easier, but you will be more prepared if you ever get audited by the IRS. An IRS agent will want to know where your money is coming from and what you spent your money on, particularly if you are claiming any unusual tax deductions.
When it comes time to file your taxes, you will be asked your total income and any deductions you plan to file. Things that may be deducted include gas and mileage if you typically travel for work, phone and utilities expenses if you tend to use your phone for business or if you have a home business, and other expenses that you may have incurred in the pursuit of your company’s goals. Deductions can help you keep your tax bill low, but be careful about taking too many. If the IRS sees a red flag, such as you taking too many deductions or illegal deductions that don’t apply to your situation, you can be audited, penalized, fined or all of the above.
As you may know, tax law can be very confusing. If you know the law and you know how to file your small business taxes yourself, by all means do so. You can save money that would otherwise go to an accountant and it will allow you to have full control over your accounting and taxes, which can help you feel even more accomplished and secure when starting a business.
On the other hand, if you aren’t familiar with tax law and you’re not quite sure how small business accounting and taxes are handled, it is recommended that you seek out the services of a qualified accountant.
Hiring an Accountant
Just as you would hire a plumber for your overflowed toilet or an electrician if one of your outlets blew up, you should contact an accountant if you want a professional to handle your accounting and taxes. A professional accountant can tell you what records to keep and can help you navigate the complicated tax law system. An accountant will also know the sweet deductions to go after so as to save you money while also remaining within said law. If you are ever audited, while you are never quite absolved from responsibility fully, you can at least tell the agent that you had a professional handle your taxes if any anomalies show up.
The bottom line is that taxes are an inevitability and they must be paid when starting a business unless you want to spend a few years in a prison cell. It is recommended that you study your type of business and the tax laws that specifically apply to you and keep accurate records about any money coming in or going out of your business on a regular basis. And above all, hire an accountant if you’re not quite sure how to handle accounting and taxes and you’d feel better letting an experienced person handle the dirty tax work. Many accountants are very reasonable and they’ll make April 15th feel like any other day, which is good news for anyone starting a business who happens to be terrified of this year’s tax season. With any luck, your taxes will be paid on time and you’ll never hear from the tax man at all. Just make sure you keep those accurate records just in case.
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