Tax Implications for Small Business Owners


Tax Implications for Small Business Owners

Owning your own small business is one of the surest ways towards financial security. But along with the risk of capital, there are risks concerning tax law that need to be addressed. Here are a few general thoughts that you might want to consider about tax implications for small business owners.

Special Warning

First of all, please understand that self-employment is a category of which the IRS takes particular notice. This shouldn’t stop you from moving forward, just be aware that you have entered a new class with a history of people trying to cheat the IRS. Understand that with the benefits of self-employment comes a responsibility to document every expense and source of income to keep yourself updated and reduce the risk of tax Issues.

Sales Tax

If your business is a retail establishment built on selling products, you will need to immediately be aware of sales tax laws! This subject will require stringent accounting as well as a knowledge of how states charge sales tax for products purchased and shipped online. In the state of Washington, this also includes excise tax, or B&O tax, which applies to both retail businesses, as well as 99.9% of other businesses.

Of all the topics, this is the one you will need to have a great understanding of starting from day one.

Income Tax and Deductions

Any profit your business produces will be subject to income tax, even if the funds get reinvested in the business. This is where your deductible expenses should become your new obsession. Saving all receipts and documenting how they are used for the company will be your lifeblood to minimizing your tax burden.

Every effort you make into saving receipts and tracking deductible expenses will – literally- pay off in the end. Automotive costs & mileage, advertising, home office, office equipment, client meals are some of the most common expenses applicable to all businesses.

There is a special $5,000 initial year tax deduction that is available for the initial start-up costs as long as you actually start the business. Once again, be sure to document thoroughly.

Self-Employment Tax

Self-employment tax is the business owner’s version of Social Security and Medicare. All net income comes under an approximate 15.3% self-employment tax up to $137,000. Medicare is 2.9% of the excess.

If you choose to make your business a corporation, you will not have to pay self-employment taxes, but there will be other implications. This is a very important decision to make early in the business formation process, as certain elections need to be made with the IRS for certain types of organizations. I highly recommend meeting with a professional to help in making the right decision for your small business.

Estimated Quarterly Payments

As a self-employed person, you will generally be required to make quarterly income tax payments to the IRS. It may take a while to get the estimate correct, but knowing this in advance will help with your tax preparation and help to avoid underpayment penalties.

Other tax implications, like property taxes and excise taxes, are not as common, but you will want to be aware of them if they apply to your small business.

Bottom line, starting a small business is among the best ways to secure your family’s financial future. Making sure you are aware of any and all tax implications are vital to your overall financial health as well as mental health.

I have decades of experience helping small to medium-sized businesses navigate business tax issues. Should you desire to talk further, I would be honored to assist you. Please feel free to call our office or reach out via email.