Tax season is a scary time from many small businesses. However if your business is set up properly you will be able to enter into the tax season worry free. One of the biggest questions asked by small business owner is do I need an EIN number. First let us answer the question what is an EIN number. An EIN is an Employee Identification number that is assigned to business as a way for the IRS to recognize the business. If you are operating a small business with employees you will be required to get one. This number will allow you to deduct taxes from your employees and channel the payments to the proper source.
If you do not have any employees than you could pay taxes on your business using our personal Social Security Number as identification. This is not a wise practice because you could be exposing your Social Security Number to identity thieves. The best advice is if you do not have employees than apply for a TIN number that is the same thing as an EIN number in the fact it allows for your business to be identified without your Social Security Number. Select a business structure that best suits your financial needs and income tax situation.
Sole proprietorships, partnerships, and LLCs all pay taxes on business profits the same way. They are considered “pass-through” tax entities. That means that profits and losses are passed through the business to the owner and the owner in turns reports their share of profits, or deduct their share of losses on their personal income tax. Sole proprietorships, partnerships, and LLCs generate close to the same tax complexities, paperwork, and cost. All of these unincorporated businesses will pay income tax on the entire net profit of the business. That includes any money that is taken out of the business each year, and any money in checking accounts allocated for business expenses. Any share of profits from the business must be reported on the owner’s personal income tax.
Corporations pay taxes differently. The owner of a corporation only pays taxes on actual salaries, bonuses, and dividends they receive. The corporation its self pays taxes on retained earnings that are left at the end of the year at a specialized corporate tax rate, that is smaller than the individual tax rate for the first $50,000 to $75,000. The separate levels of taxation may present some difficulties when filing and paying taxes, however the corporation structure is beneficial to some business owners in the fact that they do not have to pay personal income taxes on profits not yet received.
Understand the best tax situation for you and structure you business in a way that you are getting the best benefits during tax season. Once you have set your business up for tax season maintain accurate, up to date, and neat books so when tax season dose come around you will be prepared to make the process of filing taxes as quick and painless as possible.