Taxes; with and Without Employees

/ Brief #1.08
Latest Revision: 06/2017

Tax Considerations for Startup Businesses

From the start-up of your business, you need to set-up your financial records to capture all the data needed to run the business and to comply with all tax laws. Set up and maintain up-to-date records of all income, expenses, employment, payroll, sales, income, and franchise taxes. These records need to be organized so that you and your accountant can substantiate your tax filings.

Segregate your business transactions with a business bank account, debit card, and credit card, all separate from your personal bank account and cards. Capture business use of your personal automobile by documenting business mileage with dates, mileage and purpose of each trip.

All businessesmust register with the IRS to obtain an Employer Identification Number (EIN). This number is used on all tax filings and to set-up a business bank account. Use this online link:

Accounting Methods: All businesses must use a consistent accounting method, a set of rules for determining when to report income and expenses. There are two accounting methods:

Under the “cash method”, sales are recognizedwhen payment is received, and all expenses are incurred when payment is made. An example is a handyman: he pays cash for his supplies and gets paid when he completes the work. Most small businesses use the “cash method” because of its simplicity.
Under the “accrual method”, sales are recognizedwhen the revenue is earned, whether paid for or not, and costs are booked when expenses are incurred. An example is a painting company which incurs cost when their workers charge the paintat the supplier, and books sales when it bills the customer at the end of the job. If significant inventories are necessary to account for your income, you must use the accrual method for purchases and sales; you can still use the cash method for other items of income and expenses.

IRS Publication 334 - Tax Guide for Small Business: This is the essential guide for federal taxes that apply to sole proprietors, single member or multiple LLCs. This publication outlines the accounting methods that apply for revenue, cost of goods sold, fixed asset depreciation, deductible expenses, and inventories. A table lists tax liabilities with forms and filing due dates.

IRS Publication 541 - Partnerships: In addition to IRS Publication 334, multiple member LLCs should review this guide to partnership tax issues and reporting requirements.

IRS Publications 15 - Employer’s Tax Guide: This is the essential guide to calculating, withholding, depositing and reporting federal taxes that apply to the employees of businesses. A table lists the tax forms and tax filing due dates

IRS Publication 946 - Capital Assets and Expenses:Under Section 179, new or used business equipment/business-use vehicles and business software up to $500,000 may be written off, against taxable income, in the year the equipment is placed in service. Capital expenditures for leasehold improvements, and for expenditures on vehicles, equipment, and buildings over $500,000 per year is depreciated for tax purposes over their useful life.

For specific tax guidance on other federal tax topics, refer to these IRS publications:

IRS Pub 463 – Travel, Entertainment, and Auto Expense Guide

IRS Pub 505 – Tax Withholding and Estimated Tax – required reporting

IRS Pub 533 – Self-Employment Tax-Social Security/Medicare on self-employed income

IRS Pub 535 – Business Expenses – deductible/non-deductible (start-up costs)

IRS Pub 587 – Business Use of Home – how to calculate the deduction

State Taxes

Requirements: State and local tax compliance is complex, involving:

Personal income tax – applied to payroll

Municipal/school district income taxes – applied to payroll

Commercial activity/Business receipts/income tax

Unemployment insurance tax

Workers’ compensation insurance tax

Sales and use tax/vendor’s license - administered by state and county governments

County property tax

Each state tax department has a one-stop gateway to information on rates, forms and filing dates.

Ohio

Kentucky

Indiana

Local Taxes

City of Cincinnati:

• Earnings tax, currently a 2.1% rate, must be paid both by business located in the city and their workers.

City of Dayton:

• Earnings tax, currently a 2.25% rate, must be paid both by business located in the city and their workers.

Other municipalities, counties, and townships where businesses are operating may have their own taxing requirements, which may be pertinent to your income or operation. Check with the applicable government agency.

If you would like to request a Cincinnati SCORE counselor pleaseclick here.

Disclaimer

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