Starting your first business
By following these steps, you can avoid tax pitfalls and keep your business’s finances in good health from day one. Setting up the right systems early will save you time, money, and headaches down the road.
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Why It Matters: Your business structure (LLC, sole proprietorship, corporation, etc.) will impact your tax liabilities, personal liability, and financing options.
Tip: LLCs often provide tax flexibility and personal liability protection, while sole proprietorships are simpler but expose you to more personal liability. Consult a tax professional or attorney to pick the best fit.
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Open a Business Bank Account: Keep your business and personal finances separate to avoid tax complications and simplify bookkeeping.
Tip: Get a dedicated business credit card for expenses, and track all transactions through accounting software like QuickBooks or FreshBooks.
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Federal and State Taxes: Depending on your structure, you may owe income tax, self-employment tax, sales tax, and payroll tax.
Tip: Research what taxes apply in your state. Use IRS Form 1040-ES to estimate quarterly tax payments if you're self-employed.
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Track All Expenses
Why It’s Important: Properly tracking expenses helps you take full advantage of tax deductions and avoid IRS audits.
Tip: Keep detailed records of business expenses such as travel, equipment, and supplies. Many business-related expenses are deductible, such as marketing, office rent, and employee wages.
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Take Advantage of Tax Deductions
Common Deductions: You can deduct business-related expenses such as office space, equipment, utilities, and mileage.
Tip: If you work from home, you can qualify for the home office deduction, which allows you to write off a portion of your home’s expenses based on the percentage of space used for business purposes.
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Set Up Payroll and Benefits Systems
Employee vs. Contractor: Determine if your workers are employees or independent contractors, as this affects your tax responsibilities. Employees require withholding taxes, while contractors receive a 1099 form.
Tip: Use payroll services like Gusto or ADP to manage employee pay, taxes, and benefits like retirement plans and health insurance.
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Plan for Self-Employment Taxes
Self-Employment Tax: If you're self-employed, you’re responsible for paying both the employer and employee portions of Social Security and Medicare taxes (around 15.3%).
Tip: Make quarterly estimated tax payments to avoid penalties during tax filing season.
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Consider a Tax-Deferred Retirement Plan
SEP IRA or Solo 401(k): As a business owner, you can create retirement accounts that offer tax benefits, allowing you to reduce taxable income while saving for retirement.
Tip: With a SEP IRA, you can contribute up to 25% of your net earnings, while a Solo 401(k) allows higher contribution limits depending on your income.
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Budget for Taxes and Other Expenses
Why It’s Important: It’s crucial to set aside money for taxes throughout the year. Additionally, prepare for fixed costs such as rent, insurance, and employee wages.
Tip: Create a separate savings account for taxes, and automate savings based on your projected tax rate.
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Seek Professional Help Early
Why It Matters: A tax professional can help ensure you take all the right steps from the beginning to avoid costly mistakes.
Tip: Hiring an accountant or CPA can help you set up your bookkeeping, file taxes correctly, and strategize ways to reduce your tax burden.
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Take Advantage of Tax Credits
Tax Credits: Explore available tax credits for small businesses, such as the Work Opportunity Tax Credit (WOTC), the Research and Development (R&D) tax credit, and credits for hiring veterans or providing health insurance.
Tip: Research local or state-level tax incentives for businesses, particularly if you're in an industry like tech or renewable energy.