- Pick a business structure. One of the first things a startup will need is to decide how they are going to structure their business – as a sole proprietorship, a partnership, an S or C Corp, and so on. Each comes with different tax rules and different filing requirements, so the advice of an expert will be invaluable.
- Pick a tax year. How and when a business files its taxes is determined by its tax year, which can either match the calendar year or be a fiscal year of any 12 consecutive months. In most cases, the business owner can choose whichever works best for them – but calendar years are required for business with no books or records, no annual accounting period or in certain circumstances laid out in the IRC.
- Know your business taxes. Besides income tax, a business may be subject to self-employment tax, employment tax and/or excise tax, depending in large part on the business structure it chooses. Furthermore, they may also need to make estimated tax payments on a quarterly basis.
- Pick an accounting method. Depending on the type of business and the owner, they will need to determine which set of rules to use for reporting income and expenses, which the IRS expects them to use consistently. The most two common methods are cash method (where taxpayers report income and deduct expenses in the year they occur) and accrual method (where they report and deduct in the year income and expenses are earned or incurred, even if they get the income or pay the expenses in a later year).
- Keep good records. Right from the beginning, the business owner needs to keep good records and books to identify income; track deductible expenses; track their basis in property; substantiate purchases, sales, payroll and other transactions; and make the job of their tax preparers and accountants easier. Starting with good record-keeping practices will save time later.
- Sign up for an EIN. Most business will need to apply for an Employer Identification Number, or Federal Tax ID Number, to identify themselves as a business entity in their interactions with the government.
