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By Fred Steingold
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Fred Steingold, a business lawyer in Ann Arbor, MI, is the author of
Legal Guide for Starting and Running a Small Business, The Employer's Legal
Handbook, and How to Get Your Business on the Web (all published by Nolo Press).
Q. I recently started a business. I want to be sure everything is in order when tax time rolls around. What steps should I be taking?
A. First of all, even if your business has no employees, you need to get an Employer Identification Number (EIN) from the IRS. Technically, if you're a sole proprietor or the only member of an LLC that doesn't seek corporate-type taxation, you can use your Social Security number instead. But I still recommend you get an EIN even in those cases. It helps you to separate your business finances from your personal money matters. To apply for an EIN, download Form SS-4 from the IRS Web site. One more thing: Check with your state's department of revenue to see if you need a separate number for state tax purposes.
Next, consider becoming an S corporation. If you don't, your company will be taxed as a C corporation. That means the business will be taxed, and any dividends paid to you as a shareholder will be taxed as well. But by registering as an S corporation, your company won't be taxed separately, and you and the other shareholders will handle your share of profit and loss on your personal tax returns.
If you and your tax advisor decide this is a good idea, file IRS Form 2553 (Election by a Small Business Corporation). But don't delay. You need to file the form by the 15th day of the third month of your tax year. Otherwise, you'll have to wait another year. You can download the form and instructions from the IRS Web site.
Third, learn the procedures for employee taxes. Each employee needs to give you a Form W-2 so you can figure out how much income tax to withhold from their pay checks. You also have to withhold the employee's share of the Social Security and Medicare tax and add an equal contribution from your business. Finally, there's the Federal Unemployment Tax (FUTA). It typically is $56 a year for an employee who earns $7,000 or more annually.
If you're an employee of your own company, your business must withhold income tax and pay the Social Security and Medicare tax, as with other employees. But, if you're not an employee -- for example, you're a sole proprietor or partner -- you need to deal with the self-employment tax. This is equal to the amount you and your business would pay for Social Security and Medicare taxes if you were an employee. You may need to file quarterly returns with estimated tax payments. For details, see IRS publication 505, available from the IRS site.
Finally, give yourself a break: Install bookkeeping and tax software. If you file your financial data in a shoe box, you'll be tearing your hair out at tax time. To make the job easier, look into software geared toward small business.
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