Posted by James Financial Services Inc

Tax Implications of Starting a New Business

Tax Implications of Starting a New Business

Starting a new business comes with many upfront tax issues. Let's take a look at some of the tax considerations you need as an entrepreneur when starting a business, including the big changes and uncertainty that come with becoming self-employed.


You can claim start-up tax deductions for qualified expenses

Start-up costs are the amounts you paid or incurred when you started or even researched your business. As long as you start the business, you can choose to deduct up to $5,000 of eligible costs in the first year. In addition, you are entitled to the full amount of this initial tax deduction if your expenses do not exceed $50,000.


Your income is taxable even if you elect to reinvest it in your business.

The profits your business makes each year will be taxed, whether you withdraw it or reinvest it in growing your business. However, it is recommended that you pay attention to this tax notice for start-ups - any deductible business expense can be used to directly offset this income.


You will be subject to self-employment tax.

Another tax consideration to note when starting a business is the self-employment tax. The net income of your business will be subject to this additional tax. The self-employed tax pays social security and health insurance contributions. For the 2020 fiscal year, you will currently pay self-employment tax at 15.3% of net self-employment income up to $137,700 and Medicare tax at 2.9% only for net surplus self-employment.

An additional 0.9% Medicare fee will be levied for self-employed income over $250,000 for joint deposits; $125,000 for married taxpayers filing separate returns; and $200,000 in all other cases. Self-employment tax applies in addition to income tax, but you can deduct half of the self-employment tax as an income adjustment.

While paying extra fees might seem onerous, it's designed to act the same way as Medicare taxes and Social Security that would normally be deducted from an employee's salary. In addition, the social security contribution in the tax increases the potential social insurance benefits that you can receive in retirement.

If you decide to turn your small business into a corporation, you will not be subject to self-employment tax on your income. However, you will be subject to payroll taxes as shareholders who provide services to their companies are required to receive a W -2 form salary who are withholding tax from Social Security and Health Insurance.


Filing requirements will change.

Normally, people with taxable income less than certain amounts are not required to file an income tax return for the year. In general, for 2020 taxes, a single person under the age of 65 must file an income tax return only if the adjusted gross income exceeds $12,400.

However, if you are self-employed, you must file an income tax return if your net business income is $400 or more. Even though $400 is the only income, this is well below the normal deposit limit. This implies that you may need to file taxes as a start-up when you may not have reached your threshold as an individual.


You are required to make estimated payments every quarter.

Most taxpayers meet their tax payment requirements when the employer withholds state and federal taxes from every paycheck. When you are self-employed and start a business, taxes are 100% self-sufficient. Most self-employed taxpayers meet their tax payment obligations by making quarterly tax payments online or by mail.

If you work as an employee of another company, in addition to self-employment, you can meet the tax payments imposed by increasing the withholding tax on your salary.

Failure to pay the required payments could result in a penalty for non-payment. Sanctions can be avoided if certain exceptions or specific exemptions are respected.

Penalty = Interest rate applied by IRS for deficiencies (×) Amount not paid during the period of non-payment.


You will be subjected to a new business tax inspection

Unfortunately, self-employed taxpayers will be one of the IRS's preferred target audit groups. While being audited doesn't mean you have problems, it's best to always be prepared for it unless you've done something wrong. In particular, you must carefully record your income and expenses to claim the full amount of the deductions to which you are entitled.

Certain expenses, such as cars, travel, entertainment, meals, and home office expenses, require special attention as they are subject to special record-keeping requirements and/or restrictions deductibility.


FOR MORE INFORMATION ON HOW JAMES FINANCIAL SERVICES, INC. CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CLICK THE BLUE TAB ON THIS PAGE.


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