Tax Considerations for a New Business

December 18, 2019
Man holding receipt above a table with tax documents on it

Here’s a universal truth: every wage-earning working person in the US will pay taxes either through regular deductions from paychecks or estimated tax payments, no matter your career or field.

The IRS and each state prefer that everyone pays their taxes as they go.  The IRS wants you to pay in at least 90% of the owed taxes during the year or 100% of the amount owed in the prior year, whichever is smaller. 

For many people, taxes are withheld from their paychecks as they are working for other people. But what do you do if you own your own business?

Paying Taxes as a Small Business

There are many differences between paying taxes as a wage earner and paying as a small business! 

LLC members that are taxed as a sole proprietorship or a partnership are considered self-employed business owners rather than employees of the LLC, so they aren’t subject to tax withholding. 

For clarification, the members are responsible for making sure they have set aside enough money in order to pay the taxes on that member’s share of the profits. This includes both Income Tax and Employment Tax on those profits.  

The members must estimate the amount of tax they will owe for the year and make quarterly payments to the IRS and the State/Local tax authorities, if they are in a State/Locality with an Income Tax.  Payments are due by the 15th of April, June, September, and January of the following year.  

Quarterly Tax Estimates

Another kind of taxation example would be an LLC that has elected S-Corporation taxation. They are then required to pay a reasonable salary to the owners of the business. That salary amount would have Income Taxes being withheld on the amount paid – however, the remaining profit would not have taxes being withheld on it. Therefore, Quarterly Estimated Tax payments should be done for the remaining amount as well. 

It isn’t just business owners who should stop to consider Quarterly Estimates.  After the 2018 tax law changes, many wage-earning workers found that their W-2 jobs were not withholding enough from their paychecks to cover what they owed in taxes, resulting in not a tax refund, but a bill from the IRS.

You might also have rental properties that are generating positive income, taking distributions from a retirement account that may or may not have taxes withheld already, or have other things such as stock sales during the year.  

By completing a Quarterly Estimated Tax payment you can prepay the taxes during the year, avoiding a large, unexpected payment owed when you file your taxes.

In Conclusion

Preparing for your first year of paying taxes as a small business can be daunting. But, identifying what kind of small business you’re operating, making an effort to avoid tax mishaps before they happen, and working to document accurate expenses, write-offs, and other required tax paperwork will save you time and money in the long run! 

Being prepared for tax submissions absolutely beats scrambling to pay taxes or undergoing an audit later down the road.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.