Tax Reporting

New businesses are responsible for reporting taxes, as well as paying taxes to the United States Government. This includes businesses with one employee, and businesses with hundreds of employees. This article looks at the variety of issues associated with new business tax reporting.


1. Filing Business Taxes

Individuals are required by federal law to file taxes with every job where they make at least $600 in a given year. Business taxes do not work the same way as individual taxes, especially new businesses. When starting up a new company, an employer needs to file taxes, whether the company made a profit or not. As many new companies take some time to begin making a profit, it isn't surprising that many businesses report a loss on their taxes in the first few years. The Internal Revenue Service, or the IRS, realizes this, and generally gives new companies leeway during their first few years of operation. If a company continues to report a loss after several years, typically five, the IRS may investigate further with an audit. This is done to ensure that the company is not trying to hide money, or cheat the government out of any taxes. If any discrepancies are found, the company may have to pay back taxes. Businesses are responsible for federal, state, and local taxes for the company. The business is also responsible for social security, Medicare, and unemployment taxes for each of their employees, regardless of how long the employee worked for the company.

2. Paying Business Taxes

A new business may not be expected to pay taxes during the first few years it is in operation. As explained above, many new companies report a loss during the first few years of operation. As the new business struggles to find its footing, the start-up costs of running a business, advertising, and hiring new employees, along with other business related expenses, may cost more than the business makes. Rather than working at a profit, the business is then running at a loss. In some situations, the business can actually write off this loss on their taxes, and avoid making any payments. However, once a business begins turning a profit, the owner must pay taxes to the Federal Government. Paying business taxes actually falls into two separate categories: taxes paid throughout the year, and taxes paid at the end of the year. Throughout the year, the business is responsible for withdrawing taxes from every employee paycheck that is issued. These taxes include federal, local, state, social security, Medicare, and unemployment taxes. At the end of the year, the business is responsible for reporting their overall income, along with any losses or gains. Those businesses that must pay taxes to the Federal Government can do so online over the Internet, or by mailing a check to their local IRS branch. If the business cannot make a lump sum payment, they can file for an extension. Another option is to work out a payment plan with the IRS in which payments will be made throughout the year. Different options can be discussed with a professional accountant or tax preparer.

3. Business Related Expenses

Business related expenses generally refer to anything that is used to keep the business functional and operational. These expenses can be listed, and many companies are then able to write these expenses off on their taxes. The problem is deciding between what is actually a business related expense, and what is not. In the past, certain companies have made headlines by trying to write off expenses that were not allowed, whether it was an honest mistake or unscrupulous business practice. While a hotel stay is considered an expense if it relates to a business trip, family vacations do not count. The same holds true for cars, clothing, and numerous other things. Business expenses include anything that keeps the business running, not individual members of the company. This includes the rental of property where the offices are located, upkeep of the offices, and sometimes the equipment used in the office. It also includes the items needed daily to keep the company running such as pencils, paper clips, pens, computer ink, paper, etc. Anything purchased must be used solely for the business, and not for any personal reasons. If a new business plans to use any of these expenses as a deduction on their income tax, they must save the receipts for future use.

4. Self-Employment Requirements

Not all businesses have multiple employees and a large office to work from. Some of the biggest businesses in the world started with one employee working out of their own home. This is known as self-employment, or being self employed. Any business, even if it has only one employee, is required to pay taxes. Before looking at the taxes relating to self-employment, the topic itself needs to be defined. As described above, an individual must file taxes for any job where they make $600 or more in a given year. This includes anyone working out of his or her own home as an independent contractor. Generally speaking, an independent contractor will sign an agreement with an employer stating that they are responsible for paying their own taxes, rather than the employer withdrawing taxes with each paycheck. This type of job is also known as "freelance," and applies to anyone who works on a case-by-case basis including writers, artists, and graphic designers. Self-employment refers to both part-time and full-time jobs, and any job that an individual makes at least $600 on will require them to file taxes. Anyone who works a part-time job, even if that money is paid under the table, will require taxes being paid. A common mistake made by individuals is not paying taxes on money because the employer does not report it to the government. This can result in an audit, and more serious fines or punishments. According to the IRS, anyone who has a business or makes money doing something part time is considered self employed and required to pay taxes on any money made.

5. Self-Employment Taxes

Self-employment taxes work the same way as business reporting taxes, except that the individual is required to have a tax account number. This may also be known as a tax identification number, or simply a tax account. Some individuals who register with their state as a licensed corporation will be given a separate number, but most individuals use their social security number as their tax account number. Individuals are required by federal law to file for taxes, and pay taxes on any job where they make at least $600 in the calendar year. Self-employed individuals may have several jobs where they reach this amount throughout the year, and each job requires a filing. An employee who works for an employer will automatically have their federal, state, and local taxes withdrawn from every paycheck, as well as Medicare and social security taxes. Self-employed individuals do not have that luxury. Instead, they are responsible for paying those taxes themselves. Depending on the amount of money made during the year, they may also be responsible for paying business related taxes in their state. Self-employed individuals are also responsible for filing their taxes by April 15, just as any other business.

6. Self-Employment Related Expenses

Running a business requires a multitude of expenses, and so too does working as a self-employed individual. There are a number of expenses associated with working on your own, especially if you work out of the home. These expenses can be compiled, and later written off on your taxes as business related expenses. One expense that many use as a deduction on their taxes is the home office deduction. This applies to individuals who work out of their home, and use their home office as their main place of business. Self-employed individuals can also consider gas as an expense, if they use their car to drive somewhere for a work related issue. This can include business meetings, driving to complete work, and doing research at an outside location. The current rate as established by the Federal Government is $0.47 per mile. Expenses for the self-employed individual include anything the person needs to complete their work. This may be as simple as pens and paper, to more complicated things such as payments to a job finding service and specialized software. In some situations, especially for freelance writers and artists, they may be able to consider a computer as an expense, and use it as a deduction on their taxes.

7. When to File

As discussed previously, there is a difference in when to file for a new business versus a self-employed individual. A new business should file taxes beginning with the year that the company starts, regardless of whether a profit is made. Even if a company results at a heavy loss that first year, it is still required by law that they pay taxes. Self-employed individuals are required by law to file taxes for each job that earns them a minimum of $600. If the individual works for four different employers as an independent contractor and earns at least $600 for each of those jobs, they must file taxes. Depending on their expenses and deductions, they might not have to pay the complete taxes on those jobs, but they still need to file. Just as a business may report at a loss, so too can the self-employed worker. Once they factor in costs and expenses, the self-employed individual may be operating at a loss. Everyone is required to file taxes by April 15 of the calendar year. The IRS may grant an extension on this date, but the proper paperwork and channels must be followed first.

8. When to Seek Help

There comes a time in the life of any new business where it becomes very difficult, if not impossible, to continue filing taxes without professional help. This may be because the company has increased the number of employees; they have suddenly experienced an extreme loss, or their profits have increased dramatically. The same holds true for individuals who are self employed. A self-employed individual will often work for several companies over the course of a year as an independent contractor. They may work for ten or more companies, and be expected to file and pay taxes on each of those jobs. While it may be easy for some to file their individual taxes, once they form a business, the process becomes more difficult. At anytime when it becomes frustrating and difficult to work through the tax process, the individual or company should seek help with their tax preparation. A professional tax preparer can make the process easier, and take some of the tension and stress away from the individual or new business.

9. Where to Find Help

Business reporting taxes can be a complicated situation, but there are ways to find help. Many companies use their own internal accounting department whose responsibility is to file taxes, and schedule payments with the IRS, if needed. With new businesses and those that are self employed, using a private accountant may not be possible. Instead, these individuals can hire a public accountant, or licensed CPA, to do the work for them. They may also seek help from a reputable and well-known tax preparation service such as Jackson Hewitt or H&R Block. The tax preparer can look through the receipts, losses, and profits of the company or individual. He or she can also help the company find deductions they may otherwise not know about, and discover the best way to file their taxes. If payments need to be made to the IRS, the tax preparer can set up a payment schedule. In general, the tax preparer can make the tax process much simpler. Some self-employed individuals cannot afford to hire a tax preparer, but they may find help by using tax preparation software. This software can easily be installed on a computer, and then used to complete the taxes and file online. The best tax preparation software works the same as a professional tax preparer, but without the high expense. Anyone who still needs help can contact his or her local branch of the IRS for more assistance.
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