When it comes to setting up and operating a startup, it’s hard to keep track of all the essential tax issues that may benefit and hurt your business.
There are quite a few tax benefits and problems to become familiar with. Today, your McAllen Virtual CFOs (VCFOs) at Gonzalez & Arrambide, Inc. will share five key startup tax issues that entrepreneurs need to be aware of.
Tax Issues Startup Owners Need to Know
- Sales Tax
One startup tax problem businesses face is sales tax, which is a tax applied to businesses and consumers from the sale or leasing of goods and services. How these goods and services are categorized and taxed varies from state to state and at times the city or county from where they’re sold and purchased.
The tax is calculated as a percentage of the sale price. The applicable tax rate will vary by region. You can find more information regarding sales tax categories by searching your specific state or city. With today’s modern business setting, sales tax can be especially tough for companies that retail their products through state lines, and/or with locations in several states.
The sales tax is expected to be collected by the seller from the person who bought it at the time of the sale. The seller will then transfer the funds to the state, city, or county when filing their business’ tax return.
- Payroll Tax
Payroll tax is from the state and federal level, and is based on the compensation of employees. Generally speaking, payroll tax is calculated as a percentage of the salaries given to employees.
When payroll is being processed, these taxes are kept from employee pay, collected by the employer and covered on the side of the employee and the company. A federal tax deposit is often done within three days of processing payroll checks.
Companies that fail to pay payroll taxes can be charged with a federal offense by the IRS. The IRS can go after owners even if they’re limited liability companies.
- Net Operating Losses
If your startup is a C-corporation, you should know the advantage of Net Operating Losses, or NOLs.
In the timeframe where a company’s operating costs surpass revenues, an NOL has been formed. When a company has Net Operating Losses, it may be utilized to cancel out any taxable income in the years that follow.
A common error made by new businesses is forgetting to file a tax return within years where an NOL could be implemented and therefore used to nullify future cash flow.
- Employee/Contractor Predicaments
Most startups have a preference for hiring independent contractors instead of full-time employees to avoid having to pay for Social Security, Medicare, unemployment and health insurance. This is normal given the fact that budgets may not be where they need to be to maintain a full-time team.
Nevertheless, it is imperative to distinguish between the two. The IRS always keeps a close eye on companies that hire lots of independent contractors.
Whether an employee is actually an independent contractor depends on how much control the employer has over them. If the IRS were to claim it as a misfiling, it could bring problems for your company.
Take a look at the IRS publication 15-A for a helpful guide to distinguish whether you need W-2s for employees or 1099s for contractors.
- Documentation of Income and Costs
All businesses should have an organized record/bookkeeping system for each and every income and deductible expense. Quickbooks may be the most common method of electronic bookkeeping for startups and successfully keeps your books tidy.
The IRS suggests small businesses should keep the following records:
- Gross Receipts of Income: cash register tapes, deposit information, receipt books, invoices, and 1099 forms.
- Investments (items you purchase and resell to customers): canceled checks, cash register tape receipts, credit card receipts and statements, and invoices.
- Bills: Canceled checks, cash register tapes, account statements, credit card receipts and statements, invoices, and petty cash slips for smaller cash payments.
- Travel, Transport, Entertainment, and Gift Expenses: Refer to IRS publication 463.
- Assets (e.g. machinery and furniture): maintain all records, keep tabs on annual depreciation and gain or loss when sold; when and how you received asset, buy price, improvement costs, deductions taken for depreciation, deductions taken for casualty losses (fires or storm damage), the way the asset is used, when/how the asset is disposed of, selling price, and costs of sale.
- Employment taxes: maintain all employment records for four years minimum.
The Virtual CFOs at Gonzalez & Arrambide can be your guide to getting your business started financially.
At Gonzalez & Arrambide, our Virtual Chief Financial Officer (VCFO) services are intended to support startup businesses and help to keep them financially stable.
Educating yourself on these matters can save you and your startup money in the long run as you navigate yourself through these fiscally uncertain times.
If you’re a startup in need of guidance, let us help you break down every bit of tax information and come up with a financial plan tailored to your business needs.