Not all business planning involves documenting and strategic work. You’re going to need to worry about the financial side of it. The United States Internal Revenue Service (IRS) has outlined several basic steps that you’re going to need to follow in order to make sure your business is in compliance with federal laws.
The first step that you’re going to need to do is apply for an employer identification number (EIN) or perhaps more commonly known as the Federal Tax Identification Number. It’s your means of verification with the US government that you are a business entity, which you can easily obtain for free. To get an EIN, you can apply online, by phone, fax or by regular mail.
After you’ve done the application for an EIN, just specify your business structure. As explained in an earlier post on Unintentional Entrepreneur, there are several different kinds: sole proprietorship, partnerships, corporations and limited liability corporations. You can read more about these different structures by clicking here.
Did you know that there are two different calendars? And that it was also important to choose which of the two you wanted to follow when running your business? The next step from the IRS is to choose your tax year: fiscal or calendar. Defined by the IRS as an annual accounting period for keeping records and reporting income and expenses, your tax year is used to help define your taxable income and report to the government. So what are the differences between a fiscal and calendar year?
- Calendar year – A calendar tax year is 12 consecutive months beginning January 1 and ending December 31.
- Fiscal year – A fiscal tax year is 12 consecutive months ending on the last day of any month except December. A 52-53-week tax year is a fiscal tax year that varies from 52 to 53 weeks but does not have to end on the last day of a month.
It should be noted that there are specific rules and regulations that should be adhered to when choosing a tax year. You can read more information on the IRS website by clicking here. Should be noted that once you’ve chosen a tax year, you may not be able to change it without IRS approval.
The IRS also instructs all taxpaying entities to choose from among two different accounting methods: cash and accrual. Here’s the definition according to the IRS:
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 an 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 is made.
To help account for everything, don’t forget that you’re going to need to have your employees fill out forms I-9 and a W-4 – these forms will help make an accurate assessment of your taxable income.
Lastly, pay your taxes. The IRS wants to make sure that you’re prepared to pay for the variety of taxes that you might incur as a business. Some of the taxes you might have to pay include: income tax, estimated tax, self-employment tax, excise taxes, and more.
While these are the things the IRS recommends you consider and plan for before starting your new business, do not take what is written here on it’s face value. Consult with a certified public accountant for what you will need to do in order to suit your business.
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