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IRS Tax Tips September 5, 2023
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Issue Number: Tax Tip 2023-108
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*Tax basics for setting up a business*
Starting a new business can seem overwhelming for new entrepreneurs or even seasoned professionals. The IRS has resources to help new business owners [ [link removed] ] understand the tax responsibilities of running a business.
Here are a few things any entrepreneur needs to do when starting their business.
*Choose a business structure*
The form of business [ [link removed] ] determines which income tax return a business needs to file. The most common business structures are:
* Sole proprietorship [ [link removed] ]: An unincorporated business owned by an individual. There's no distinction between the taxpayer and their business.
* Partnership [ [link removed] ]: An unincorporated business with ownership shared between two or more members.
* Corporation [ [link removed] ]: Also known as a C corporation. It's a separate entity owned by shareholders.
* S Corporation [ [link removed] ]: A corporation that elects to pass corporate income, losses, deductions and credits through to the shareholders.
* Limited Liability Company [ [link removed] ]: A business structure allowed by state statute. If a single-member LLC does not elect to be treated as a corporation, the LLC is a "disregarded entity," and the LLC's activities should be reflected on its owner's federal tax return as a sole proprietorship.
*Choose a tax year*
A tax year [ [link removed] ] is an annual accounting period for keeping records and reporting income and expenses. A new business owner must choose either:
* *Calendar year*: 12 consecutive months beginning January 1 and ending December 31.
* *Fiscal year*: 12 consecutive months ending on the last day of any month except December.
If an individual files their first tax return using the calendar tax year and later begins business as a sole proprietor, becomes a partner in a partnership, or becomes a shareholder in an S corporation, they must continue to use a calendar tax year unless they get IRS approval to change it or meet one of the exceptions listed in the instructions to Form 1128, Application To Adopt, Change, or Retain a Tax Year [ [link removed] ].
*Apply for an Employer Identification Number*
An EIN is also called a Federal Tax Identification Number. It's used to identify a business. Most businesses need one of these numbers, but some don?t. For example, a sole proprietor without employees who doesn't file any excise or pension plan tax returns doesn't need an EIN. The EIN checklist on IRS.gov [ [link removed] ] can help business owners know if they need an EIN.
It's important for a business with an EIN to keep the business mailing address, location and responsible party up to date. EIN holders should report changes in the responsible party [ [link removed] ] to the IRS within 60 days.
*Have all employees complete these forms*
* I-9, Employment Eligibility Verification U.S. Citizenship and Immigration Services [ [link removed] ]
* W-4, Employee's Withholding Allowance Certificate [ [link removed] ]
*Pay business taxes*
The form of business determines what taxes should be paid [ [link removed] ] and how to pay them.
*Visit the state's website*
Prospective business owners should visit their state's website [ [link removed] ] for info about state tax requirements.
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