Starting Your Own Business Step 3 - Accounting and Taxes
7/05
This is the third article of a four-part series in this column about starting your own business. Once your business has been started and you start receiving income for your products or services, you must have your accounting system in place.
A business checking account is essential. To open a business account you will need an Employer Identification Number (also known as a Tax ID Number). Your attorney or accountant can assist you with this or you can obtain your own on the IRS’ web site irs.gov. Your accountant can be very helpful in getting you started with a system that will assist you with bookkeeping, payroll and tax paying functions.
At the end of the year, you will have to account for all of your income and expenses, thus it is important to set of the various accounting categories from the start so that your income and expenses can be categorized on an ongoing basis. You do not want to walk into your accountant’s office at the end of the year with a shopping bag full of receipts and deposit slips. You will save time and money by having an organized computer system which tracks the various categories.
A good accounting system is essential for any business but extremely important for the business start-up. There are many software programs that will allow you to track your income and expenses. Assigning categories to these items will enable you to create, weekly, monthly, quarterly and yearly reports on revenue and cash flow. This will allow you to evaluate your business’ strengths and weaknesses and to make the changes necessary to grow your business and ensure its success.
If you are self-employed, you will have to pay self-employment taxes on a quarterly basis. The best way to do this is to withhold and segregate money from each of your paychecks so that you have funds to pay this tax at the end of the quarter. If you are an employer, you are required to withhold taxes from each of your employee’s paychecks. You are also required to pay the employer’s share of Medicare and Social Security and Unemployment taxes on a monthly basis and New York State payroll taxes on a quarterly basis. An account, payroll service or good software program is necessary for this purpose.
Having your own business can be an expensive proposition; however, with these expenses also comes numerous business deductions which may help your family’s overall tax liability. For small businesses deductions for the business use of your automobile or home office can be beneficial. Many business start-ups lose money in the first year or two and these losses can be offset against income earned by a spouse. For many serious hobbyists (photographers, artists, gardeners, car enthusiasts, etc.) turning your hobby into a small business may be a good way to turn your hobby expenses into business deductions. You do not necessarily have to turn a profit in your business although the intent to profit must be there. The IRS has rules which set forth how many years your business can deduct losses.
You cannot succeed in your business without a suitable accounting system in place and without knowing the tax ramifications of running your business. If you are a “hands-on” type of business owner, there is ample software available that will allow you to handle the accounting and tax functions of your business yourself. If you are like many entrepreneurs who prefer to focus strictly on the service or product you are selling, it is essential that you retain a good bookkeeper or accountant to help with the books.