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Starting a Small Business:
Tax Requirements
Source: Managing
a Small Business
Much of the information in
this guide refers to the federal tax requirements. For tax
and wage reporting requirements at the state level, please
refer to This
website, which links directly to existing Web sites for
each state.
Before you begin, most of the
tax forms and tax publications you'll need for your business
are available free on the Internet. They are, however, in
PDF format. If you have have trouble reading or printing the
publications, please make sure you have the newest version
of the Adobe
Acrobat Reader.
What form should the
business take? Your first decision.
One of the first decisions you
must make when starting a business is determining the form
of business to use. The following paragraphs briefly
describe the more common options.
Sole proprietorships.
A sole proprietorship is an unincorporated business that is
owned by one individual. It is the simplest form of business
organization to start and maintain. The business has no
existence apart from you, the owner. Its liabilities are
your personal liabilities and you undertake the risks of the
business for all assets owned, whether used in the business
or personally owned. You include the income and expenses of
the business on your own tax return.
Publication 334, Tax Guide for Small Business, explains how
the federal tax laws apply to sole proprietorships.
Download Publication
334, Tax Guide for Small Business
Partnerships.
A partnership is the relationship existing between two or
more persons who carry on a trade or business. Each person
contributes money, property, labor, or skill, and expects to
share in the profits and losses of the business. A
partnership is not a taxable entity. Each partner includes
his or her share of the partnership's income or loss on his
or her tax return. Publication 541, Partnerships, explains
how the federal tax laws apply to partnerships.
Download Publication
541, Partnerships
Corporations.
In forming a corporation, prospective shareholders transfer
money, property, or both, for the corporation's capital
stock. A corporation generally takes the same deductions as
a sole proprietorship to figure its taxable income. A
corporation can also take special deductions.
The profit of a corporation is taxed to both the corporation
and to the shareholders when the profit is distributed as
dividends. However, shareholders cannot deduct any loss of
the corporation.
Publication 542, Corporations, explains how the federal tax
laws apply to corporations.
Download Publication
542, Corporations
S Corporations.
An eligible domestic corporation can avoid double taxation
(once to the shareholders and again to the corporation) by
electing to be treated as an S corporation. An S corporation
generally is exempt from federal income tax. Its
shareholders include on their tax returns their share of the
corporation's separately stated items of income, deduction,
loss, and credit, and their share of nonseparately stated
income or loss.
For more information, see Instructions for Form 1120S, U.S.
Income Tax Return for an S Corporation.
Download Instructions
for Form 1120S, U.S. Income Tax Return for an S Corporation
Farming.
You are in the business of farming if you cultivate,
operate, or manage a farm for profit, either as an owner or
tenant. A farm includes stock, dairy, poultry, fish, fruit,
and truck farms. It also includes plantations, ranches,
ranges, and orchards. Publication 225, Farmer's Tax Guide,
explains how the federal tax laws apply to farming. Use this
publication as a guide to figure your taxes and complete
your farm tax return.
Download Publication
225, Farmer's Tax Guide
Direct selling.
You are a direct seller if you meet all of the following
conditions:
- You are engaged in the
trade or business of:
- Selling or soliciting
the sale of consumer products, either:
- In a home or other
place that is not a permanent retail
establishment, or
- To any buyer on a
buy-sell basis or a deposit-commission basis for
resale by the buyer or any other person in a
home or other place that is not a permanent
retail establishment, or
- Delivering or
distributing newspapers or shopping news (including
any services directly related to the trade or
business).
- Substantially all of your
pay (whether paid in cash or not) for services described
in (1) is directly related to sales or other output
(including the performance of services) rather than to
the number of hours worked.
- Your services are
performed under a written contract between you and the
person for whom you perform the services, and the
contract provides that you will not be treated as an
employee for federal tax purposes.
As a direct seller, you
usually sign up with a particular company to sell its
product line. The company may refer to you by using one of
the following titles:
- Consultant
- Coordinator
- Dealer
- Demonstrator
- Designer
- Director
- Distributor and direct
distributor
- Instructor
- Manager or supervisor
- Representative or sales
representative
For more information, see Publication 911, Direct Sellers.
Download Publication
911, Direct Sellers
Commercial fishing.
Some special tax rules apply to individuals who have their
own fishing trade or business. These individuals include:
- Fishing boat owners or
operators who use their boats to fish for profit,
- Certain fishermen who work
for a share of the catch, and
- Other individuals who
receive gross income from fishing.
If you feel this describes your business, Publication 595,
Tax Highlights for Commercial Fishermen, pertains to you.
Download Publication
595, Tax Highlights for Commercial Fishermen
Do I need any identification
numbers?
The two most common kinds of taxpayer identification numbers
are the Social Security Number (SSN) and the Employer
Identification Number (EIN).
What is an Employer
Identification Number (EIN)?
EINs are used to identify the
tax accounts of employers, sole proprietors, corporations,
partnerships, and other entities.
If you don't already have an
EIN, you need to get one if you:
- Have employees,
- Have a Keogh plan,
- Operate your business as a
corporation or partnership, or
- File any of these tax
returns:
- Employment.
- Excise.
- Alcohol, tobacco, and
firearms.
You can get an EIN either
through the mail or by telephone, but first you must fill
out Form SS-4, Application for Employer Identification
Number. You can get Form SS-4 at IRS or Social Security
Administration (SSA) offices.
If you want to know more
about EIN, see our EIN
page or Publication 1635.
Download Form
SS-4, Application for Employer Identification Number
Download Publication
1635, Understanding Your EIN
What about paying others?
In the operation of a business, you will probably make
certain payments you must report on information returns. You
must give the recipient of these payments (the payee) a
statement showing the total amount paid during the year. The
forms used to report these payments must include the payee's
identification number, as well as your identification
number.
If the payee is an employee, use the SSN.
If you must report payments to an organization, such as a
corporation or partnership, use its EIN.
When do I start my tax year?
You must figure taxable income on the basis of a tax year. A
"tax year" is an annual accounting period for
keeping records and reporting income and expenses. The tax
years you can use are:
- A calendar year.
- A fiscal year.
If you adopt a calendar year,
you must maintain your books and records and report your
income and expenses from January 1 through December 31 of
each year.
Generally, anyone can adopt
the calendar year. However, if any of the following apply,
you are required to adopt the calendar year.
- You do not keep adequate
records.
- You have no annual
accounting period.
- Your present tax year does
not qualify as a fiscal year.
A fiscal year is 12 consecutive
months ending on the last day of any month except December.
A tax year is a fiscal year that varies from 52 to 53 weeks.
If you adopt a fiscal year,
you must maintain your books and records and report your
income and expenses using the same tax year.
If you operate a business as a sole proprietor, the tax year
for your business must be the same as your individual tax
year. For any other form of business special rules apply.
Publication 538, Accounting Periods and Methods, describes
these rules.
Download Publication
538, Accounting Periods and Methods
What accounting methods do I
use?
Each tax payer must use a consistent accounting method,
which is a set of rules for determining how and when to
report income and expenses. The most commonly used
accounting methods are the cash method and the accrual
method. Under the cash method you generally report income in
the tax year you receive it and deduct expenses in the tax
year you pay them. Under the accrual method you generally
report income in the tax year you earn it, regardless of
when payment is received, and deduct expenses in the tax
year you incur them, regardless of when payment was made.
For other methods, see
Publication 538, Accounting Periods and Methods.
Download Publication
538, Accounting Periods and Methods
What kind of business taxes
must I pay?
There are four general kinds of business taxes:
- Income tax,
- Self-employment tax,
- Employment taxes, and
- Excise tax.
Income tax
All businesses except
partnerships must file an annual Income tax return.
Partnerships file an information return. Which form you use
depends on how your business is organized.
Self-employment tax
Self-employment tax is the
Social Security and Medicare tax for individuals who work
for themselves. Your payments of self-employment tax
contribute to your coverage under the social security
system. Social security coverage provides you with
retirement benefits, disability benefits, survivor benefits,
and medical insurance (Medicare) benefits.
You must pay self-employment
tax if
- Your net earnings from
self-employment (excluding income described in (2) below
are $400 or more, or
- You performed services for
a church as an employee and received $108.28 or more.
You are self-employed (and
subject to self-employment tax) if you carry on a trade or
business as a sole proprietor, an independent contractor, a
member of a partnership, or are otherwise in business for
yourself. You do not have to carry on regular full-time
business activities to be self-employed. Part-time work,
including work you do on the side in addition to your
regular job, may also be self-employment.
Wages and salaries received
for services performed as an employee and covered by social
security or railroad retirement, however, are not
self-employment income. Nor are tips received for similar
services as an employee.
See Publication 533, Self-Employment Tax, for more
information.
Download Publication
533, Self-Employment Tax
Employment taxes
Employment taxes are:
- Federal income tax
withholding,
- Social Security and
Medicare taxes, and
- Federal unemployment (FUTA)
tax.
Generally, employees are
defined either under common law or under special statutes
for special purposes. Anyone who performs services for you
is your employee if you can control what will be done and
how it will be done. This is so even when you give the
employee freedom of action. What matters is that you have
the right to control the details of how the services are
performed. See Publication 15-A, Employer's Supplemental Tax
Guide, for more information on how to determine whether an
individual providing services is an independent contractor
or an employee.
If you want the IRS to determine whether a worker is an
employee, file Form SS-8, Determination of Employee Work
Status for Purposes of Federal Employment Taxes and Income
Tax Withholding, with the IRS.
Download Publication
15-A, Employer's Supplemental Tax Guide
Download Form
SS-8, Determination of Employee Work Status for Purposes of
Federal Employment Taxes and Income Tax Withholding
Excise taxes
You may have to pay excise taxes if you:
- Manufacture or sell
certain products,
- Operate certain kinds of
businesses, or
- Use various kinds of
equipment, facilities, or products.
For more information on excise
taxes, see Publication 510, Excise Taxes.
Download Publication
510, Excise Taxes
Which taxes apply to my
business?
| If You Are a: |
You May Be
Liable for: |
| Sole
Proprietor |
Income
tax
Self-employment tax
Estimated tax
Employment taxes |
| Partnership |
Annual
return of income
Employment taxes
Excise taxes |
| Partner
in a partnership (individual) |
Income
tax
Self-employment tax
Estimated tax |
| Corporation
or S corporation |
Income
tax
Estimated tax
Employment taxes
Excise tax |
| S
corporation shareholder |
Income
tax
Estimated tax |
How do I deposit my taxes?
You generally have to deposit employment taxes, certain
excise taxes, corporate income tax, and S corporation taxes
before you file your return. Mail or deliver deposits with
completed deposit coupons to an authorized financial
institution or a Federal Reserve bank for your area unless
you make the deposits electronically.
Deposit coupons.
Form 8109, Federal Tax Deposit
Coupon, is used for depositing taxes. On each coupon, you
must show the deposit amount, the type of tax, the period
for which you are making a deposit, and your telephone
number. Use a separate coupon for each tax, period, and
deposit.
Five to six weeks after you
receive your employer identification number (EIN), as
discussed earlier, the IRS will send you the coupon book. If
you have a deposit due and there is not enough time to
obtain a coupon book, blank coupons (Form 8109-B) are
available at most IRS
offices. You cannot use photocopies of the coupons to
make your deposits.
If you have not received your
EIN and must make a deposit, mail your payment with an
explanation to the IRS Center where you file your return.
Make your check or money order payable to the Internal
Revenue Service. On the payment, write your name (exactly as
shown on Form SS-4), address, kind of tax, period covered,
and date you applied for an EIN. Do not use Form 8109-B in
this situation.
Electronic deposit of taxes.
Generally, taxpayers whose total
deposits of Social Security and Medicare taxes and withheld
income tax during previous years exceeded certain amounts
are required to deposit taxes through the Electronic Federal
Tax Payment System (EFTPS).
Taxpayers not required to
make deposits by EFTPS may enroll in the system, which will
allow tax deposits without coupons, paper checks, or visits
to an authorized depositary. For more information, see
Publication 15, Circular E, Employer's Tax Guide, below.
To participate in EFTPS
you must first enroll. For more information or an enrollment
form, you may call EFTPS Customer Service at:
- 1-800-945-8400 or
1-800-555-4477;
- 1-800-945-8900 or
1-800-733-4829 (TDD Hearing Impaired) and
- 1-800-945-8600 or
1-800-244-4829 (Espanol).
Download Publication
15, Circular E, Employer's Tax Guide
What are information
returns?
If you make or receive payments in your business, you may
have to report them to the IRS on information returns. The
IRS compares the payments shown on the information returns
with each person's income tax return to see if the payments
were included in income. You must give a copy of each
information return you are required to file to the recipient
or payer. In addition to the forms described below, you may
have to use other returns to report certain kinds of
payments or transactions. For more details on information
returns and when you have to file them, see the Instructions
for Forms 1099, 1098, 5498, and W-2G.
Download Instructions
for Forms 1099, 1098, 5498, and W-2G
What business expenses are
deductible?
To be deductible, a business expense must be both ordinary
and necessary. An ordinary expense is one that is common and
accepted in your trade or business. A necessary expense is
one that is helpful and appropriate for your trade or
business. An expense does not have to be indispensable to be
considered necessary. For guidance in determining allowable
deductions, see Publication 535, Business Expenses.
Download Publication
535, Business Expenses
Can I deduct for business
use of my home?
To deduct expenses related to the business use of part of
your home, you must meet specific requirements. Even then,
your deduction may be limited. To qualify to claim expenses
for the business use of your home, you must meet the
following tests.
- Your use must be:
- Exclusive (however,
see Exceptions to Exclusive Use in Pub 587 below),
- Regular,
- For your trade or
business, AND
- The business part of your
home must be one of the following:
- Your principal place
of business for your trade or business, or
- A place of business
where you meet or deal with patients, clients, or
customers in the normal course of your trade or
business, or
- A separate structure
(not attached to your home) that you use in
connection with your trade or business.
Download Publication
587, Business Use of Your Home
Can I deduct travel,
entertainment, gifts and local transportation?
You may be able to deduct business-related expenses you have
for:
- Travel away from home,
- Entertainment,
- Gifts, or
- Local transportation.
Your expenses for travel away
from home and for local transportation may include car
expenses. Publication 463, Travel, Entertainment, Gift, and
Car Expenses, explains what expenses are deductible, how to
report them on your return, what records you need to prove
your expenses, and how to treat any expense reimbursements
you may receive.
Publication 463 deals with
expenses of employees and sole proprietors. Other businesses
(such as partnerships, corporations, and trusts) and
employers who reimburse their employees for business
expenses should refer to their tax form instructions and
chapter 16 of Publication 535, Business Expenses, for
information on deducting travel, entertainment, gift, and
transportation expenses.
Download Publication
463, Travel, Entertainment, Gift, and Car Expenses
Download Publication
535, Business Expenses
What kinds of records should
I keep?
Except in a few cases, the law does not require any special
kind of records. You may choose any recordkeeping system
suited to your business that clearly shows your income. Your
recordkeeping system should include a summary of your
business transactions. This summary is ordinarily made in
your books (for example, accounting journals and ledgers).
Your books must show your gross income, as well as your
deductions and credits. For most small businesses, the
business checkbook is the main source for entries in the
business books.
Purchases, sales, payroll,
and other transactions you have in your business will
generate supporting documents such as invoices and receipts.
These documents contain the information you need to record
in your books. It is important to keep these documents
because they support the entries in your books and on your
tax return. You should keep them in an orderly fashion and
in a safe place.
The following are some of the
types of records you should keep.
-
Gross receipts
Gross receipts are the
income you receive from your business. You should keep
supporting documents that show the amounts and sources
of your gross receipts.
-
Purchases
Purchases are the items you
buy and resell to customers. If you are a manufacturer
or producer, this includes the cost of all raw materials
or parts purchased for manufacture into finished
products. Your supporting documents should show the
amount paid and that the amount was for purchases.
-
Expenses
Expenses are the costs you
incur (other than purchases) to carry on your business.
Your supporting documents should show the amount paid
and that the amount was for a business expense.
-
Assets
Assets are the property,
such as machinery and furniture, that you own and use in
your business. You must keep records to verify certain
information about your business assets. You need records
to figure the annual depreciation and the gain or loss
when you sell the assets.
Download Publication
583, Starting a Business and Keeping Records
Is there a tax service that
can help?
The IRS publishes the Guide to
Free Tax Services, Publication 910, (see below) which
identifies the many IRS tax materials and services available
to you, and how, when, and where you can get them. Most of
the materials and programs are free and available year-round
through the IRS. Internet, telephone, and fax access of tax
materials, filing options, tax publications, tax education
and assistance programs, and tax tips are covered in this
guide. The guide also lists telephone numbers for recorded
tax information, automated refund information, and IRS
mailing addresses.
Download Publication
910, Guide to Free Tax Services
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