• Summit Bookkeeping

Federal Tax Responsibilities When Starting a Business

Having a business comes with a lot of responsibilities. In this blog post, we’ll try to make it a little easier by going over some of the federal tax responsibilities you may have as a business owner starting out. It’s important to note that states and cities typically have additional tax responsibilities so you should check with your local departments to ensure you are in compliance with necessary tax payments and reports.


Choose a Business Structure

When you start a business, one of the first things you need to do is choose your business structure, also known as a business entity. Your business structure will determine how you’re taxed and who is liable for business debt. The most common structures are:

  • Sole proprietorship

  • Limited Liability Company (LLC)

  • Partnership

  • Corporation

  • S Corporation (S-corp)

The SBA has a great article on choosing a business structure if you would like to learn more about your different options. Once you choose your structure, you will need to register through your state department. For Washington state business owners, you can apply on the Washington Secretary of State website.


Apply for an EIN

An employer identification number (EIN) is used to identify your business. If one of the following applies to you, you are required to have an EIN:

  • You have employees

  • You operate your business as a corporation or partnership

  • You file an Employment, Excise, or Alcohol, Tobacco, and Firearms tax return

  • You withhold taxes on income, other than wages, paid to a non-resident alien

  • You have a Keogh plan

  • Your business is involved in certain organizations including trusts, IRAs, estates, non-profit, and more which you can find on the IRS website

Even if the above doesn’t apply, you may need to get an EIN for business matters such as opening a business bank account or taking out a business loan. You can apply for an EIN on the IRS website.


Determine a Tax Year

A tax year is a 12 consecutive month period in which you will keep records and report income and expenses. You can use:

  • The calendar year beginning January 1 and ending December 31

  • A fiscal year of 12 consecutive months ending on the last day of any month except December. For example, your fiscal year could start on July 1 and end on June 31.

Your tax year will be determined when you file your first income tax period. In some cases, you may be required to use the calendar year.


Choose an Accounting Method

Accounting methods provide guidelines on how to record transactions and apply income tax. The two methods are:

  • Cash basis accounting: account for cash when it’s received and expenses when they’re paid

  • Accrual basis accounting: record transactions when revenue is earned and expenses are incurred.

Typically, cash basis accounting should only be used for very simple businesses. Accrual basis accounting will provide you with a bigger picture of your income and expenses for a period of time.


Submit Employee Forms

Hiring new employees will add to your list of tax responsibilities. When you hire a new employee, you are required complete the following forms:

  • W-4, Employee’s Withholding Certificate: Provides employee information and how much you need to withhold for federal taxes. (IRS)

  • I-9, Employment Eligibility Verification: Verifies employee’s identity and eligibility to work in the U.S. (U.S. Citizenship and Immigration Services)

States may have additional requirements, so make sure to check with your state to see if you have other employer forms. For businesses in Washington state, we have a blog post on the basics of Washington state payroll.


Pay Business Taxes

Here’s the part of business many people may dread: paying business taxes. Federal taxes you may be responsible for as a business include:

  • Income tax

  • Self-employment tax

  • Employment tax

  • Federal unemployment tax (FUTA)

  • Excise tax

Your business taxes vary based on your business type, whether you have employees, and where you’re located. If your business is located in Bellingham, WA, we have a blog post about the tax and reporting duties for Bellingham businesses.


File and Report End-of-Year Tax Returns

At the end of the year, you will need to provide W-2s and 1099s to the IRS in addition to employees and contractors you hired during the year. These forms are due by January 31, along with a handful of other end-of-year reports. You will also need to file a business tax return, for which the deadline depends on your business structure.


Meet with a Professional

This is a brief wrap-up of common responsibilities you should know about when starting a new business. Every business is different so we recommend you meet with an accountant or business consultant to ensure you’re fulfilling all required responsibilities.

 

Disclaimer: This post is meant for informational purposes only and should not be taken as legal, business, or tax advice. Please consult with your accountant or bookkeeper for more information based on your specific situation. For more information, please read through the following resource: