The new year always brings an entrepreneurial spirit.
Before you start a business, there are some important things to consider.
📌Choose a tax entity that is right for you
Sole proprietorship – You get all the profits of the business, but also all its expenses, debts, and risk.
Partnership – Share ownership with one or more people.
LLC – Protects members from personal liability. All profits flow to personal income and are subject to self-employment taxes.
S-Corp- A special type of corporation that allows for profits and losses to pass through to the shareholders
Corporations offer the greatest protection from personal liability, but they’re also generally more expensive to establish.
📌Accounting Method Matters
Cash Method – you account for income when cash is received, and you account for expenses in the year you pay them.
The cash method is adopted by most small business owners because it’s straightforward and easy to use for tax purposes.
Accrual Method – you account for income in the year earned. Ex: You finish the job in December 2021, but don’t receive payment until January 2022. You would still recognize the income on your 2021 taxes.
The same goes for expenses.
📌 Tax Planning is Crucial
Depending on which entity you pick, you could pay self-employment tax.
That’s 15.3% of net earnings (12.4 Social Security tax and 2.9 Medicare tax).
If you want to avoid big tax bills, you have to plan.
Consult a tax professional and discuss tax deductions and credits that you could possibly take in the first year of business.
Conclusion
There are some tax implications with entrepreneurship. Take some time to learn how business taxes work and how you can make the most of yours.
Contact us to get a better understanding of the taxes your need to pay and when to pay them.
