 Internal Revenue Service IRS Tax News! IRS recognizes Small Business Week! Oh no, they see us! I thought we were under the radar! Once recognized by the IRS, it's best to play possum. The IRS typically pouncing on whatever they see rustling in that green grass of cash. Next week, once the IRS's Small Business Spotlight is turned off, it should be safe for us Small Businesses to go out again and forge for food. In any case, IRS recognizes Small Business Week, information and free resources for starting a business. There's a link to a YouTube video about this from the IRS, IRS Small Business Self-Employed Tax Center. It's an ASL as well, IR 2022-98, May 2nd, 2022, Washington. During National Small Business Week, May 1st to the 7th, the IRS is highlighting the tax benefits and resources tied to the Small Business Administration theme for this year's celebration. Quote, Building a Better America through Entrepreneurship. End quote, there's a link to that here. During the National Small Business Week, the Internal Revenue Service wants taxpayers to know there are free resources on IRS.gov, IRS.gov, IRS.gov, v for victory over tax questions for those that are starting a business. Small Businesses play a pivotal role in the nation's economy. The IRS has a variety of resources available to help employers meet their tax responsibilities as well as help their employees selecting a business structure. So how would, should you select your business structure here? We're typically talking about the type of business that you are running as sole proprietorship, partnership, for example, S corporation, C corporation and so on. So when beginning a business, taxpayers must decide what form of business entity to establish. The form of business determines which income tax return form must be filed. The most common business structures are the sole proprietorship, when someone owns an unincorporated business by themselves. So if you just start business, if you just start doing stuff and earning revenue, then the IRS is typically going to call you a sole proprietorship. If you're doing that basically by yourself, not in partnership with somebody else, easy to format, easy to format, but it doesn't have some of the liability protection and so on and so forth as some other structures. Partnership, the relationship between two or more people to do trade or business. So if two people just start doing business, they will typically just simply be considered a partnership. Now note that if you go into a partnership, there's a significant level of increase in just complexity in the business. So obviously by default, the IRS is just going to say, I want you to report your taxes and pay me my share as your silent partner over here. But if there's two or more people you will typically want to on your own in define exactly who's doing what and what the terms are, what's expected in the partnership because that easily partners can, if that's not clearly designated, even if you know the other person quite well, that will complicate matters a lot. But from a tax standpoint, of course, what's going to happen is you can't really have one schedule C as easily on a form 1040 because now you got one partnership that's going to have to allocate the income to multiple people. So typically you have to have another tax return in order to calculate the partnership income that will then flow through to the partners incomes using what's known as a K-1 form. That also adds a significant level of complexity. So note that if you are a sole proprietorship, for example, and you're basically the driving force of this small business and you're thinking about you want to pull someone else in possibly for more help from for the work and possibly take for a capital, your questions are, do I want to take on an equity interest like a partnership interest or do I want to hire? Do I want to have like an employee situation or something like that? And so that's something just to consider from that perspective. So corporations inform in a corporation a prospective shareholders exchange money property or both for the corporation's capital stock. So when you go to a corporation, a C corporation, a normal corporation, that's usually when you're going from a smaller business to a bigger business at that time, generally, because there's benefits of being a normal C corporation, but there's also complications with it such as the idea of double taxation. And so now you've got another tax return that has to be filed, but it's actually its own kind of separate entity or thought of in essence as its own separate entity. And when there's flow through from the corporation to the owners, it's now dividends and you could be taxed on the dividends as well as the corporation being taxed on the corporate level. So you got that. That's where that double taxation thing comes in. Then they tried to kind of fixed and get the best of both worlds with something like an S corporation and limited liability companies. S corporations are corporations that elect to pass corporate income, losses, deductions and credits through to their shareholders for federal tax purposes. So that's going to be more likely a smaller business is going to be the S corporation as opposed to possibly a larger business. That's just a general kind of rule. You can have large S corporations and whatnot, but larger business normal C corporation S corporation might be smaller because you're trying to get a pass through entity or possibly some tax benefit situations through a pass through entity as well as possibly getting liability protection without getting hit with the kind of double taxation situation. You get with the C corporation, similar situation with the limited liability company. The LLC are allowed by state statutes and may be subject to different regulations. The IRS will treat the LLC as either a corporation partnership as part of the owner's tax return, e.g. sole proprietorship depending on elections made by the LLC and its number of members. So it gets a little bit complicated with the LLC. You might be able to pin on the state type like a single member LLC, which kind of is treated similar to a partnership, but I mean similar to a sole proprietorship, but might give you more liability protection than typically you would think of the LLC. If you have multiple people involved that it would be similar to an S corporation that it would be a flow through type of entity typically looking kind of like a partnership type of flow through structure within it similar kind of objectives as the S corporation, but there's pros and cons with it depending that will be dependent upon things like the industry that you're in there might be pros and cons between the S corporation, the LLC and then payroll tax situations have some kind of funny ramifications between them and state taxes might actually tack these two entities, even though they're similar in flow through differently. So wherever the state taxes you're involved in could have implications. So if you're jumping up, so remember that just remember that if you are starting out as a sole proprietorship and you talk to a professional that's that's that's what they do is is they make sole proprietors like S corporations and limited liability companies that just remember that when you talk to them, it's likely that that's they're going to they're going to argue for they go into an S corporation or a limited liability company as opposed to saying a sole proprietorship, but in part that that's because of course that's what they do right they get paid to do to do that change. So that doesn't mean that they're wrong that their arguments are wrong. You're going to hear the arguments of liability protection and and so on. You could have tax benefits between some of these depending on your circumstances, but it also increases the level of complexity in the tax return, which means that you've got to be in compliance with whatever the rules are for an S corporation, limited liability company and it's quite a bit more complicated to do the tax calculations on these entities because you have to do two tax calculations or two tax returns and do a flow through and so on as opposed to a sole proprietorship, which is just a schedule. See even a partnership jumps up a bit in complexity because it's a whole another tax return that might have to be filed from a sole proprietorship. The sole proprietorship's other options, the typical reason people want to move up move over is for liability protection. That's one of the big arguments. You can also just think so your question is do I have enough liability protection with insurance or something like that or do I need the added level? Can I get to a single member LLC? How much liability protection would that give and still have a pretty simple kind of tax return? And you might want to talk to someone when you're looking at these kind of entities and you're being overwhelmed with should I change my entity structure? Talk to someone that you're not paying to level up to a different item here. So and because by doing that you might get an independent decision because if you're talking to someone whose job it is to create S corporations then doesn't mean they're wrong, but that means that they might be biased towards obviously making S corporations. One of the problems with S corporations and limited liability companies and corporations is it's a little difficult to un-make them. And sometimes you get taxed on the state and so the state you got these ghost companies that kind of are still are still going because you can't close the thing. It's easy to make them, but it could sometimes be difficult to close them. And then the state keeps on charging you their minimum tax or fee or whatever they want to call it. And so that can be a tedious thing as well. So you might want to talk to an independent person. I would recommend if you can to get an independent decisions or in your particular circumstances. So understanding business taxes, the form of business being operated determines what taxes must be paid and how to pay them. The following are the four general types of business taxes. You got the income tax. All businesses except partnerships must file an annual income tax return. Partnerships file an information return. You got the self employment tax is social security and Medicare tax primarily for individuals who work for themselves. So once again, let's take a look. These the income tax. All businesses except partnerships must file an annual income tax return. Partnerships file an information return. So the income tax is going to be, you know, report that's the major tax we think about when we actually file the tax returns to form 1040. We majorly think about the income tax with it. There's going to be flow-throughs with the other kind of with the other kind of entities like an S corporation flows through. So you're going to have to have an information return right with the S corporation and the limited liability company, which will flow through to the form 1040 and you got to deal with the income tax. That's the main thing we think about with the most people with the IRS. But then you also got the self employment tax as social security and Medicare tax primarily for individuals who work for themselves. Meaning this is kind of the self employed equivalent to payroll taxes, which are withheld. If you're a W2 employee, if you're a sole proprietorship, you can't get away from the payroll taxes, social security and Medicare typically because they are now tacked on in the form of self employment tax, which if you're a sole proprietor will be reported in a self employment tax kind of calculation payments contribute to the individuals coverage under the social security system. And so we got the employment tax when small businesses have employees, the business has certain employment tax responsibilities that it must pay for and forms it must file. So the employment taxes are going to be taxes that if you have employees, then you're going to be dealing with the employment taxes, which again, a lot of those are social security and Medicare. And there's also a question as to you as the owner, are you an employee of the business? And it kind of depends on the structure. If you're a sole proprietorship, then you're not paying yourself income, but this the net income of the business is going to be subject to self employment tax. Whereas if you're an S corporation, then you're it's kind of like the same thing. It's a separate entity. So it's a separate entity, even though it's a flow through entity. So in that instance, you have you have to be an employee of the business. You have to actually pay yourself a reasonable wage and that's where it gets all kind of tricky with this with the S corporations in terms of what's a reasonable wage and whatnot. But then you might have to pay, you know, yourself, you know, as a small business kind of situation so that you will be subject to the self employment tax. That's basically the reason or what the IRS is kind of looking for on that one. So because it's not going to be taxed on the flow through with the self employment tax, whereas the partnership on the other hand flows through to the 1040. I believe you're still taxed for the self employment tax on the with the 1040. So we have the excise tax. So excise taxes are imposed on various good services and activities. So taxes may be imposed on the manufacturer, retailer or consumer, depending on the specific tax. Note generally businesses, owners must pay taxes on income, including self employment tax by making regular payments of estimated taxes during the year. So you got to make the estimated tax payments during the year because they want their money as the year goes and you might say, well, how do I do that? I have no, I have no idea how much money I'm going to make. I know what I'll do. I'll just figure out how much I make, you know, each quarter and then and then and then multiply that times my tax rate and give that to the IRS. But you can't even do that because there's a progressive tax rate. So how do you know how much you're going to pay them until you actually do the tax return at the end of the year so that you can apply the proper progressive tax rates to figure out. Well, then they have to do a projection. It's messy. Yeah, it's it's not perfect. You got it. You got to make a projection for the whole year and then like divided by four basically and and if you don't do that, then the IRS hits you with the penalty and entry sticks. So those are metaphorical sticks. By the way, I'm not saying the IRS actually hits people with sticks. Just to clarify here, metaphorical penalties and interest sticks are what are what we're trying to avoid knowing when to get an employer identification number, the EIN and employer identification number. EIN is also known as the federal tax identification number and is used to identify a business entity. Generally, businesses need an EIN. This is a free service offered by the internal revenue service and business owners can get their EIN immediately. So the EIN you might think, well, it's an employer identification number. I only need it if I need employees, but not always the case, even if you're a sole proprietorship, then you sometimes have to give your your business number to other people so that they can 1099 you for example, and you don't really want to give your social security number because that's one not secure and two because it doesn't look that professional typically either. So that's another reason you might want the EIN number even if you don't have any employees, which is pretty easy to get. That one's pretty easy to do. Keeping good records, maintaining adequate records will help small businesses monitor their progress, preparing financial statements, identifying sources of income, keep track of deductible expenses, keep track of their business or their basis in property, prepare their tax returns and support items reported on their tax return. Taxpayers should maintain their records for at least three years and that's probably the bottom line or the lowest number of three years, why three years you might ask because that's kind of generally the statute of limitations. The IRS has to come back and try to take you out. They're going to come back and question you or audit you or something and obviously when you make your tax return, you might have a pretty good idea of what happened last year. You're probably like, I don't know. It was pretty tough still, but if you come back three years later and you're trying to answer questions to the IRS and they're like, what did you spend this $500 on April 2, three years, you know, something like, you know, you know, this is going to be difficult unless you unless you have the documentation, but note that so you want to have good records in the event that they come back for an audit because they can't do so for basically any reason after three years, but they can go further than that. If they if there's a significant amount of error that they suspect or if fraud, they can go back basically any time. So you might want to keep them longer than that. And if you have employee records, it's almost pretty much thought that you want to keep those basically for all time because the person that's most likely to sue you unfortunately or cause problems is typically an employee and it's also one of the most complex kind of areas to just keep all the data on because there's so much data with the withholdings and the paycheck stubs and did you did you were you're compliant with the HR and the given the paycheck stubs and whatever and this and that. So you want to keep that records typically for a good a good while choosing the business year small businesses must figure their taxable income on the business basis of a tax year a quote tax year end quote is an annual accounting period for reporting income and expenses. The tax year's small business can use our calendar year. You got the 12 consecutive months beginning January 1st and ending December 31st. That's the easy one. My year's the calendar year. Fiscal year 12 consecutive months ending on the last day of any month except December a 52 53 week tax year is a fiscal tax year that varies from 52 to 53 weeks but does not have to end on the last day of a month. So for more information you got some links down below for some some more reading materials that you can you can curl up in a comfortable place and and peruse. We've got the small business and self-employed tax center. Hobby or business IRS offers tips to decide small business tax workshop 10 steps to start your business industries professions and business tax centers. There's links to all that wonderful stuff here. There's a link to this in the description.