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Small Business Self Employment And Tax Concepts

Updated on November 9, 2013
Small Business Preparation
Small Business Preparation

Small Business Self Employment And Tax Concepts

What you need to know about your business plan and the role taxes play. The essential concepts for setting up your business must be well thought out and then you have to implement the system that best fits your needs. When deciding a plan of action smart people will sit down and examine all the possible available. Too many business people have fallen short for the lack of planning when setting up a business. Starting your business can be very rewarding if you take the time to set it up with the tools essential to success. There are five things to consider and get done starting out and then improving as the business grows toward success.

Five Essential Considerations To Implement

  1. EIN (employer identification number)
  2. Record Keeping
  3. Bookkeeping & Accounting
  4. A Form Of Business Organization
  5. A Paid Tax Preparer

The federal employer identification number (EIN), is necessary not just because the number identifies a business but it is also used to legalize accounts with banks, creditors, and suppliers that the business will be needing to do there business. The Employer Identification Number is needed to do the next nine steps as the business succeeds and goes forward.

Recommended steps for Business Success

  1. Pay wages to the employee (s)
  2. Have and set up self employment retirement plan
  3. Operate your business, partnership,or corporation
  4. a requirement to file any State or Federal Tax Returns
  • Employment
  • Excise
  • Fiduciary
  • Alcohol, Tobacco, And Firearms

The EIN is not necessary for a sole proprietor business , except that banks, creditors, and suppliers require it to do business with them. The IRS, will give you one in any case if you request one. The easiest and Fastest way to get one is online at Then enter the Keyword: "EIN"
Once you have your decision to get an EIN it is time to move on to next step in the plan for success record keeping.

Record Keeping

You must keep adequate and complete records for your business. There are some very important things to conciser when records are needed to be recorded.

  1. Receipts
  2. Sales slips
  3. Invoices
  4. Bank deposit slips
  5. Canceled checks
  6. Other things to document for substantiation
  • Income
  • Deductions
  • Credits
  • Prevent omissions of deductible expenses
  • Establish earnings for self employment tax purposes
  • Explain items on your tax returns

It is a good idea to keep these records for years after you file or pay your taxes. The IRS require records kept for four years after the date on which the tax is due or paid, whichever is later.. Good tip is to keep them if possible ten years encase of an audit. IRS publication PUB15 will help to explain IRS records requirements.

Book Keeping Systems

There are two types of book keeping systems that business use today, "Single Entry", and the other is "Double Entry".

The single entry system is the simplest to do.

  1. Records a daily and monthly summery of income and expenses
  2. It is not a complete accounting system
  3. Shows income and expenses in sufficient detail for tax purposes
  4. Focuses on the business profit and loss statement and not on its balance sheet

Double entry system is more focused and requires more information to be used that includes the balance sheet.

  1. Built in checks and balances
  2. More accurate information recording
  3. Self balancing

With either system accuracy is very important and care should be taken to do diligent when using them both. Many company problems come up because of in accurate reporting. The use of good book keeping companies can help keep mistakes to a minimum because they do that every day. You can employ someone to do the book keeping, or do it yourself. Some book keepers will come to your location, and others ask you to bring records to their location.

Accounting Methods

Accounting is the way you decide when, and how, to report your business expenses. There are two types of accounting methods used in business, one is "Cash", and the other is called "Accrual" methods. Let us examine the two types in a little more detail.

  • Cash System
  1. Reports all income in the year you receive payment
  2. Deducts expenses only in the year in which you pay your taxes
  • Accrual Method
  1. Reporting income in the year you earn it regardless of when you receive payment
  2. Deducts expenses in the year you incur them regardless when you pay them

Business's that have inventory for sale to customers most generally use the accrual method for sales and purchases. Business's with less than ten million dollars a year may use the cash method. Some of the Business terms as "Income Statement" and "Cash Flow Analysis" should be considered too.

  • Income Statement
  1. This is the way that income is stated and gives an overview of your company's revenue, costs, and profitability.
  • Cash Flow Analysis
  1. A detailed monthly account of how money flows into your business as income and flows out as expenses.
  2. Subtracting expenses from your receipts gives you a monthly result of how well your business is doing.

With help for setting up your business "Click Here"

The Five Forms Of Business Organization

When setting up your business a careful study of how the business is formed and the entities involved and their entitlements. Basically that's the structure and setup of the authorized operations. It also allows for the way interactions between the owner, Partners and or stockholders, and the administration of liability for taxes, debits or dividends are done. There are five categories framed to follow.

  1. Sole Proprietorship
  2. Partnership
  3. Limited Liability Company or (Partnership)
  4. S Corporation
  5. Corporation
  • The Sole Proprietorship is an unincorporated business that one person owns, usually as a DBA (Doing Business As). The advantage of this type is that it's the simplest to operate. One person makes all the operating decisions and is the sole responsible party, and carries all the liability. The biggest disadvantage is the limited resource of Capital for operations and products needed.
  • Partnership is a relationship between two or more owners who join together to carry on trade or business. They are easy to organize, and have a greater financial strength than a sole proprietorship. They combine their skills, and judgments, that the partners have to contribute. Each of the partners have a personal interest in the success of the business, and it's performance in the community they serve. The disadvantage is that the liability of the partners is usually unlimited. The division and authority is divided, and all income is passed to the partners and the personal income taxed.
  • Limited Liability Company (or Partnership) may be treated as a Sole Proprietorship, Partnership or Corporation. The owners have a limited personal liability for the debts and actions of the LLC. Management is flexible, and the benefits flow through to the taxation process. This makes it one of the most popular forms today.
  • S Corporation is a Small Business Corporation on whose shareholders elect to have income taxed like a Partnership,and file taxes on profits, income, employee compensation or pay distribution.
  • Corporation is treated by law a a Legal Entity, and the life of the business is perpetual. Stockholders have limited liability and the transfer of ownership is easy. The raising of capital and expansion is done more easily. Both small and large business plans are adaptable to the corporation. Corporations are taxed twice once on the compensation of the corporation, and once on the shareholders dividend. This form is more difficult and expensive to organize.

Two Options Self Or Paid Tax Preparer

One of the most critical events to prepare for is Taxes. There are only two ways to do your taxes. One of them is to take the chore on yourself, or in the case of a corporation or partnership have the accounting department set up a division to handle the taxes in house. This will most probably be cost effective for the business. The other choice is to pay someone to do it for you. This way is more time saving for the company, but it too has some disadvantages. Remember the tax laws make it clear that any sort of tax evasion is punishable by up to five years imprisonment and a ($25,000) twenty five thousand dollar fine! That's why it is important to choose well.

Because You Are Ultimately responsible there are a few things that should be a must when choosing the rite tax preparer.

Ten Commandments Of Taxes To Keep

  1. Avoid Preparers who claim they can obtain larger refunds than other company's
  2. .Avoid those preparers that base their fees on the amount of your refund.
  3. Look for a preparer that gives Copy's of all paper work.
  4. Ask Questions, and get references.
  5. Find out what credentials they have.
  6. Who are they affiliated with, and what Professional Organizations?
  7. Never sign a blank tax return
  8. Never sign a completed tax form without reviewing.
  9. Make sure you understand everything on the tax forms.
  10. Consider whether the tax preparer will be around if needed later.

Then at the end of the day you should be in good shape to succeed. Take a moment of your time to check out some people that can give you more information on the subject of Small Business by Clicking Here

Please leave a comment to let me know what you think of this subject and if in the future it goes well I have some other points to post about Small Business and Self employment Taxes. Please if you like this post click the like button.


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