As a new small business owner, making the right choices from the start means minimizing your tax burden, taking advantage of tax breaks for business owners, and avoiding potential fines and other consequences later. We discuss three of the most important start-up tax issues below.
Choose the Right Organization for Your Company
You have the option to register your business as a limited liability corporation (LLC), C-Corp, or S-Corp.
An S-Corp is a company that passes its income, credits, losses, and deductions to stockholders for tax purposes. Each stockholder then reports income or losses on their individual tax return. The benefit to the company is that the Internal Revenue Service (IRS) doesn’t double tax its corporate income. Your company must meet the following criteria to qualify:
· Only offer one class of stock
· Sell stocks only to individuals or certain trusts and estates
· Not exceed 100 stockholders
· Register as a domestic corporation
· Operate as an eligible corporation under IRS rules
The most important thing to understand about a C-Corp is that the IRS taxes it separate from its owners. The IRS doesn’t impose limits on who qualifies as a stockholder, nor does it limit the company to offering only one type of stock. Most for-profit organizations are C-Corps.
Limited Liability Corporation
An LLC also limits the personal liability of its owners by offering flow-through taxation. This could make a good option if you operate a smaller company and want to retain as much flexibility as possible.
If you have employees, you must withhold money from each paycheck and remit it to the IRS and your state government. You will also need to withhold funds to cover Medicare and social security for each employee. This normally requires you to determine a percentage to withhold based on the employee’s salary and the number of exemptions he or she claims. The employee portion of Medicare is 6.2 percent while the withholding for social security is 1.45 percent up to a certain income threshold. You pay the identical amount in Medicare and social security for each employee.
Improper Classification of Employees and Independent Contractors
An independent contractor is a person who sets their own hours and negotiates a wage. They often work from home and perform services for several clients at the same time. The IRS and states that collect income tax require those working as independent contractors to submit their own taxes four times each year.
Because this is so convenient for employers, some deliberately misclassify employees as independent contractors to avoid having to make payroll tax deposits. If someone works at your facility, follows a schedule you set and has no definite end date of employment, he or she is an employee. However, someone working off-site can still be an employee if you control his or her working schedule.
Learn More About Start-Up Tax Issues During A Personal Consultation
At Nolan Accounting, we understand that start-up tax issues can seem overwhelming. We invite you to schedule a tax planning session with us to ensure that your business gets off to the best possible start.