Ditching the 9-5 world is something that most of us dream about. If you’ve been fortunate enough to leave the 9-5 world behind to start your own business, your tax outlook will change considerably. Here is what to expect in starting your own business:
Obtain an EIN (Employer Identification Number) While an EIN isn’t required if you’re a sole proprietor, it is a good idea. You’ll reduce your risk of identity theft if you use your EIN instead of your Social Security number when filing your taxes.
Choose a business structure: While it’s important to consult with an attorney prior to launching a business, there are four possible business structures to consider:
- Sole proprietorship
- LLC (Limited Liability Corporation
- C or S corporation
Each business model carries with it specific implications for your taxes, so it is vital that you enlist a qualified attorney or tax pro before starting out. They can advise you on the best business model to suit your needs and goals.
You can restructure your business as your needs and goals change over time.
As a business owner, you may have access to tax deductions that weren’t available to your in your 9-5 days. They can include:
- Business-related meals, travel, and entertainment
- Business-related auto expenses
- Rent of office space or for home office use
- Office equipment
- Health insurance costs for your employees
- Start-up expenses
You’ll need to keep accurate records of all income and expenses in order to claim any of these deductions. Keep all receipts related to your business deductions.
There is a variety of productivity software packages and apps that can help you keep this chore manageable over time.
Quarterly tax payments
Unlike the traditional work structure where you paid your taxes at the end of the year, as a business owner you are required to pay quarterly taxes if:
- Your business is a sole proprietorship, partnership, or S-Corp shareholder
- You expect to earn $1,000 or more from business activities
You are required to pay at least 90 percent of your tax balance in order to avoid significant fees and penalties. If you’re not sure how to calculate your quarterly taxes, be sure to consult with a qualified tax professional.
Starting your own business can be rewarding: no set schedules, no office politics, and the ability to perform work you truly care about.
Along with the rewards of small business ownership come a unique set of challenges: determining the ideal business structure, managing expenses and deductions, and a significant change in how and when you pay taxes.
Make the start-up phase of your business as easy as possible by consulting with a knowledgeable tax professional who can provide valuable input as you structure your business and establish yourself as a business owner.