5 Tax Tasks to Do If You Started a New Business in 2020
Despite the COVID-19 pandemic, many entrepreneurs took the leap and started their business in 2020. If you’ve seen a need in your industry or a service being unmet, now is a great time to launch your business.
One roadblock that many entrepreneurs face is how to handle their business taxes. If you started a new business this year, here are some key tax tasks to put on your to-do list.
1. Determine your business structure.
When you register your business with your state, you’ll need to determine your legal business structure. Each structure has its own positives and negatives, depending on your business and how it’s run, and the one you choose will directly determine how the government taxes you. For instance, as a sole proprietor, your business assets and debts are tied to your personal assets and debts, while a corporation (C corp, S corp, B corp, etc.) is considered a separate business entity for which the owners are not personally liable.
Structures like limited liability companies and limited liability partnerships offer a “hybrid” model, where business finances still pass through to the owner, but provide greater protection from business debt liability. The right model for you depends on your desired business ownership structure and tax situation.
2. Obtain your federal Employee Identification Number (EIN).
Most business types will need to register with the federal government to obtain an Employer Identification Number (EIN). Think of this number as a Social Security number for your business. Even if you are a sole proprietor and don’t plan on hiring any employees, it’s still a good idea to have an EIN so you can identify your company on your first business tax return and on any official business applications, such as a loan or line of credit.
3. Choose between calendar year or fiscal year.
When you file your personal tax return, it is typically based on the calendar year. Businesses have the option of choosing to operate on their own fiscal year, which may change their federal tax deadlines.
At present, the IRS is set to resume the normal tax filing deadline of April 15, 2021 for 2020 calendar year taxes. However, with many tax regulations changing due to COVID-19, be sure to stay updated on your tax deadline.
3. Hire people to help you and choose the right tax classification.
When you hire an employee, you’ll have to determine what tax classification they’ll be hired under. W2 employees are dedicated workers employed by your organization. You are required to withhold and pay certain taxes on their wages earned, and depending on your company size, you may also be required to offer employer benefits like health insurance.
1099 workers, on the other hand, are independent contractors to whom you have no tax or benefit obligation. These contractors are responsible for covering their own self-employment taxes, and because of that, businesses that hire them must be sure their working relationship is actually that of a contractor and client, and not an employer and employee. The IRS has a checklist to help you determine the nature of your relationship with your hired workers.
5. Determine your business tax obligations with the help of a trusted CPA.
Once you choose your business structure, tax year, and employee type, you’ll determine what your tax obligations are and how frequently you need to pay them.
You’ll likely need to file estimated tax payments every quarter, on top of your federal and state payroll taxes if you’ve hired W2 employees. A trusted CPA firm can help you understand what you owe and when, and how to properly budget for those payments throughout the year.
If you’re a new business owner who is unsure on how to approach their 2020 taxes, contact Miller and Company to schedule a free consultation before the end of the year.