I do not claim to be an accountant, nor very well versed in the art of creative tax preparation, but I do have a bit of experience in handling the day to day and month to month taxes. For the past five years, I have learned first and foremost that the most important thing in business is to keep accurate records for tax purposes.
I always dread the end of each physical year when it’s time to do the annual tax returns. It can be quite overwhelming for a beginner, but do not be scared … the IRS is very helpful in getting you on the right track and providing information to help you get through all the forms with a minimum of hair loss.
If you will be generating an income from your business, (which is your whole purpose right?) You will need a federal tax ID number so the tax guys can associate your business to your name. This does not sound like much fun, but believe me, it’s better to do it right the first time around than to have to deal with them after they discover that you have been running a business and not claiming your income on your taxes.
You can get all the IRS publications on how to get your Federal Employers Identification Number (FEIN) from irs.ustreas.gov which will also provide you with a wealth of information regarding business startups, record keeping and and tax information.
You will need to get a state sales tax identification number. This number is to identify you and help you keep track of your sales tax. You will need to charge a sales tax on tangible items that you sell. Sales taxes are based on your geographical location, so you will need to know what your state sales tax rates are and what the policies are for your particular state on sales tax and taxes on services. You can contact your local tax agency for assistance.
There are significant tax savings for those who are running a home based business. You are entitled to certain credits, payments and allowances. In order to claim these savings, you must first and foremost keep accurate records of the daily workings of your business.
Since you will be “self-employed”, you will be responsible for paying your own income tax, social security and medicare as well as any employee taxes if you have any employees. Property tax and sales tax are also your responsibility to report and pay them in a timely manner. Failure to do so could result in some pretty stiff fines.
The IRS provides publications which are very helpful for starting a home based business. It would be a good idea for you to call your local IRS office and request their business startup package. They are more than happy to send you anything you need to start your business off on the right foot when it comes to taxes. I personally recommend the following booklets along with the startup publication:
Tax Guide for Small Business (Publication 334)
Business Use of Your Home (Publication 587)
Self-employment Tax (Publication 533)
Tax Withholding and Estimated Tax (Publication 505)
These booklets will provide you with all the necessary details to get you started. It will also contain a list of other publications that you may find useful and will guide you through the necessary steps for getting right with the IRS.
Every transaction your business makes, will have an effect on your taxes. You make a sale, you will owe sales tax in most cases. This tax is reported monthly on a form ST-1 which will automatically be delivered to you prior to the end of each month once you have established your state sales tax ID number. You will also need to check into industry specific taxes. For instance, I have to file a quarterly ST-8 for my husband’s business, which is a Tire Tax form in which we must collect and pay a “use tax” for any tires that are sold.
Home based businesses also have certain tax advantages. You may be eligible for debts such as a portion of your mortgage interest, auto expenses, phone expenses and depreciation for equipment such as your computer. Other tax deductions are for items such as certain membership fees related to your business, postage, software used for your business and copying and reproduction costs such as business cards and flyers.
Dealing with business taxes can be very intimidating if you’ve never done it before but it does not have to be. Most tax agencies are very helpful in answering your questions and helping you get the proper forms. If you make a mistake in your tax forms, do not worry – the tax agencies will find the mistake and correct it, but it’s best to make sure you get it done right to save any penalties caused if mistakes are found by the tax Guys.