If you have just founded a corporation or set up a start-up, you may well have many questions about your company’s taxes. Staying on the right side of the IRS is always important but getting on the wrong side of them when you have a new business is not what you want at all. Here are some tax planning tips for you and your start up:
- Understand how your start-up will be taxed:
How your new business will be taxed depends a lot on what type of entity you formed:
Partnerships, LLC’s and S Corps have their corporate profits and losses reported on the personal income tax returns of shareholders, and as they are known as pass-through entities, they’re eligible for up to a 20% deduction on qualified business income under the ‘Tax Cuts and Jobs Act’ or TCJA.
C Corps are subject to corporate income tax and are treated as separate taxpayers from their owners. This often leads to ‘double taxation’, where the company is taxed on corporate profits, and the owner’s personal income is taxed separately on their individual return.
- Is your income subjected to self-employment tax?
Business income may be taxed at the rate of 15.3% under the self-employment tax, something that many business owners are unaware of, and it can go on to be taxed again as income at their normal rate.
That said, if your business is set up as an S Corps, you can classify some of the income as a salary and some of it as a distribution, meaning that you’ll only be required to pay self-employment tax on the income you earn as an employee.
- Remember Payroll and Sales Taxes:
If your business is set up as an S Corps that has employees, then you must set up a payroll system for tax payments, and if your business sells a product or service, then you’ll need to set up sales tax payments. Rules differ from state to state, city to city and county to county, so be sure to check which rules apply to you.
- Keep detailed records:
Tax planning and prep is important for any business, but especially for new start-ups who
are just finding their feet. Keeping detailed records will help when it comes to tax time, and receipts and invoices should be stored electronically or filed somewhere safe.
Be sure to keep your business and personal expenses separate to avoid any stress and confusion when it comes to reporting your taxes.
- Put aside net income for quarterly taxes:
If your business is classed as an S Corp, LLC or partnership, then you’ll be taxed at an individual tax rate for pass-through entities. However, you should still try to set aside some of your profit to pay estimated taxes every quarter, or adjust your payroll withholding to cover the additional tax you may owe from your S Corp income.
For more detailed advice and guidance about tax planning for your start-up, always seek help from a qualified and experienced tax professional.