Information to help you select a business structure, understand your business taxes and additional resources.
In celebration of National Small Business Week, May 1-7, 2022, the Internal Revenue Service featured information and resources to help small business owners and self-employed individuals understand and meet their tax obligations. Below are highlights of those resources from this year’s National Small Business Week.
Selecting a business structure
When beginning a business, taxpayers must decide what form of business entity to establish. The form of business determines which income tax return form must be filed. The most common business structures are:
- Sole proprietorship - When someone owns an unincorporated business by themselves.
- Partnerships - The relationship between two or more people to do trade or business.
- Corporations - In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation's capital stock.
- S Corporations - Are corporations that elect to pass corporate income, losses, deductions and credits through to their shareholders for federal tax purposes.
- Limited Liability Company (LLC) – Are allowed by state statute and may be subject to different regulations. The IRS will treat an LLC as either a corporation, partnership, or as part of the owner’s tax return (e.g., sole proprietorship) depending on elections made by the LLC and its number of members.
Understanding business taxes
The form of business being operated determines what taxes must be paid and how to pay them. The following are the four general types of business taxes:
- Income tax - All businesses except partnerships must file an annual income tax return. Partnerships file an information return.
- Self-employment tax - Is a social security and Medicare tax primarily for individuals who work for themselves. Payments contribute to the individual’s coverage under the social security system.
- Employment tax - When small businesses have employees, the business has certain employment tax responsibilities that it must pay and forms it must file.
- Excise tax – Excise taxes are imposed on various goods, services and activities. Such taxes may be imposed on the manufacturer, retailer or consumer, depending on the specific tax.
Note: Generally, business owners must pay taxes on income, including self-employment tax, by making regular payments of estimated tax during the year.
Additional Information
An Employer Identification Number (EIN) is also known as a Federal Tax Identification Number and is used to identify a business entity. Generally, businesses need an EIN. This is a free service offered by the Internal Revenue Service and business owners can get their EIN immediately.
Maintaining adequate records will help small businesses monitor their progress, prepare financial statements, identify sources of income, keep track of deductible expenses, keep track of their basis in property, prepare their tax returns and support items reported on their tax returns.
To view the IRS' eight lesson small business workshop click here, or for the full list of resources click here.
If you would like a consultation you can schedule one by following this link - https://calendly.com/karasseipeltax If you are interested in information specifically regarding partnerships or corporations, please schedule your appointment with Rachel Katz, CPA.