Thinking about starting a business, an important accomplishment is to acquire some knowledge about general tax responsibilities. These tax responsibilities include entity choice, business taxes, accounting methods and healthcare.
Entity Choice – In the beginning, business owners need to choose the type of entity for their business. A few common forms are a sole proprietorship, partnership and corporation. An owner may also choose to be an S corporation or Limited Liability Company. The entity selected determines which income tax forms to file. Legal liability and tax considerations are part of the decision process when selecting a business entity. A new business usually needs to get an EIN for tax purposes.
Business Taxes – Four common business taxes should be reviewed.
1. Income taxes are usually withheld by the employer. Making money in your own business requires taxes to be paid in to the government when money is earned or received.
2. Self-employment tax is a Social Security tax and Medicare tax primarily for individuals who work for themselves. Social Security tax and Medicare taxes are usually withheld by the employer. This tax should be paid in to the government when money is earned or received.
3. Employment Taxes are required to be withheld if the business hires employees. This requires calculating and withholding Social Security taxes, Medicare taxes and Federal income tax withholding. Further the employer needs to pay unemployment taxes.
4. Excise taxes are specific to industries working with the environment, communications, air transportation, fuels, heavy trucks, trailers, tractors and manufacturing.
Accounting Method – This is a system that establishes when to report income and expenses. The new business must use this system consistently every year. The two methods most frequently used are the cash method and the accrual method. The cash method, reports income in the year received and deducts expenses in the year paid. The accrual method, reports income in the year earned and deducts expenses in the year incurred; even if the income or the expenses are paid in a future year.
Employee Health Care – There is a Small Business Health Care Tax Credit that helps pay for health care offered to employees. A new business is eligible for the credit if it has fewer than 25 employees who work full-time, or a combination of full-time and part-time. There are also wages limits on the amount compensation the employee can receive. In 2014, the maximum credit is 50 percent of premiums paid.
In 2015 and after, employers employing at least 50 full-time employees or a combination of full-time and part-time employees that is equivalent to 50 full-time employees will be subject to the Employer Shared Responsibility provision.
The following information is provided as an information service only and, therefore, does not constitute tax advice and should not be relied upon. The information provided does not take into account your personal objectives, and therefore cannot be relied upon. Consult a tax adviser or contact us for more information.
CPA Firm South Florida