Tax Information for Starting a New Business
Starting a new business allows you to be your own boss and earn income based on the success of your business, but it also raises a variety of tax issues that are not a concern for average employees. If you plan to start your own business, it is important to understand the tax rules that govern businesses and self-employed individuals.
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Employment Taxes
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When you work as an employee, the paychecks you receive are less than the actual amount of money you earn because your employer must withhold some of your income to cover federal income taxes, Social Security taxes and Medicare. If you start your own business, you must withhold income from employee pay and send it to the IRS. According to the IRS, for each employee, you must also pay a matching amount for Social Security and Medicare taxes.
Self-Employment Tax
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Self-employment taxes are imposed on self-employed workers including business owners and independent contractors. Self-employment taxes amount to the taxes due for Social Security and Medicare that would normally be due on income if you were an employee. According to the IRS, the self-employment tax rate is 13.3 percent, 10.4 percent for Social Security and 2.9 percent for Medicare.
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Estimated Tax
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Estimated taxes are quarterly tax payments that business owners and other self-employed workers must make to the IRS to compensate for the fact that they do not have any income withheld by an employer. Estimated taxes include both the self-employment tax and income taxes owed. The IRS states that if you don't pay enough toward your tax obligation through estimated taxes, you may be penalized when you file your income tax return.
Business Tax Deductions
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Business owners are granted a variety of tax deductions related to operating a business that can greatly reduce the amount of tax they owe. According to the IRS, the following business expenses may qualify as tax deductions: the business use of a home (home offices), business use of a car, business start-up expenses, employee pay, retirement plans, rented space used for the business, various taxes and insurance necessary for the business. The cost of travel related to business may also be tax deductible.
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