What About Taxes
Business Bpitz in Stallion
Whether you are starting a business or have been in business for some time, what do you do about taxes? There are strict tax laws in the United States that make this is an important question, but most small business owners are focused on making money without any concern for the tax consequences. How you legally structure your business will determine how and when you pay. The first thing to do once you start a business is to get an Employer Identification Number (EIN) otherwise known as a Federal Tax Identification Number. This number is how the Internal Revenue Service identifies your business entity.
Applying for an EIN is easy; you may apply online at http://www.irs.gov or your tax advisor or CSU Bakersfield business consultant can help you. This service is offered free of charge by the Internal Revenue Service. Do not apply for a number before you begin your business. The reason being, once you receive your EIN, you must file a tax return even if you have not generated any income. If you don’t do this, you can be fined for not paying your business taxes.
The penalties for failing to file taxes can be severe. According to IRS guidelines, for each whole or part month that a return is not filed when it is due, disregarding any extensions of the filing deadline, there is a failure-to-file and a failure-to-pay-penalty. These penalties run between 5% and 25% of any unpaid tax due.
According to the IRS website, “If both penalties apply in any month, the failureto- file penalty is reduced by the amount of the failure-to-pay penalty. The penalties will not be charged if you have a reasonable cause for failing to file or pay. If you receivea penalty notice, you can provide an explanation of why you believe reasonable cause exists.”
Make sure you have proper tax advice and follow all of the rules. You have heard it said, “It’s not what you make but what you keep,” good tax planning can help you keep more of your hard-earned dollars by taking advantage of all the deductions you are legally entitled to thus lowering your tax liability.
Kinds of Business Taxes
Most businesses will be subject to four types of business taxes. First, your business must file an income tax return itemizing all of your company’s activity. Next, your business is required to pay Social Security and Medicare taxes for all employees, or self-employment taxes if you are the sole employee. Finally, if you manufacture or sell certain products, or if you operate certain kinds of businesses, use various kinds of equipment, facilities, or products, or receive payment for certain services, your business may need to pay excise taxes.
In the U.S. we have a “pay-as-you-go” tax system. This means that you cannot wait to pay your business taxes once a year on April 15, but you must pay withholding taxes, Medicare and Social Security taxes periodically throughout the course of the year. The amount of your payroll and the number of employees determines how often you pay. There are guidelines in IRS Publication 583.
While it is imperative to take care of your business taxes, it is also important to note that your business can be the best tax saving tool you have. Take time to meet with your tax advisor and educate yourself on the tax saving strategies available. Now is a great time see where you are for the year while you still have ample time to make adjustments. As always, the CSU Bakersfield SBDC is here to help. We don’t take the place of your professional, but we can provide you with the information and the strategies you need that will empower you to have a meaningful conversation with your tax pro!
Jay Thompson is a Business Consultant with the CSU Bakersfield Small Business Development Center. The CSUB SBDC provides premium, one on one, no cost consulting to small business owners in Kern, Inyo and Mono Counties. For more information visit their website at http://www.csub.edu/sbdc./i>