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
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 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.
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.
There is a lot more to starting up a business than creating a product, drafting a business and marketing plan, and making a lot of revenue. The tax collector still needs to take their cut, and taxes–even outside of a business setting–can be complicated.
At Gonzalez & Arrambide, Inc. we want to help new entrepreneurs like you get up to speed on identifying what taxes may be applicable to their business by highlighting most of the ones that they may be responsible for paying down below.
Business Taxes in Texas
In contrast with other states, the low business taxes and lack of personal income in Texas gives the Lone Star State two advantages over many other states:
- Businesses keep more of the revenue they generate.
- Top talent individuals are attracted to the lack of personal income tax.
This is even better for small businesses. With the business tax rate already being low as is, it shrinks or decreases to zero for businesses whose revenues don’t exceed particular thresholds.
For instance, smaller businesses with less than $1.18 million in receipts pay $0 in business taxes–known as the zero-tax threshold or no-tax-due threshold. Bigger businesses that have over $1.18 million to $10 million in receipts only pay around 0.375 percent, and if you’re a sole proprietor or in a general partnership, you are exempt from the franchise tax.
For startups and entrepreneurs, this can make the few early years a little less stressful.
It is, however, important to keep in mind that Texas refers to its tax on businesses as a franchise tax, but the state doesn’t have a corporate income tax. To clarify, the difference between corporate income taxes and franchise taxes is that corporate income taxes apply to profit while franchise taxes are basically a mandatory fee for companies who have the privilege of doing business in a city or state–usually determined by the capital held by or the net worth of the business organization.
S and C Corporation Taxes
The S Corporation is popular among small businesses. Texas still requires S corporations to pay its franchise tax depending on the business’s annual revenue. This tax can only be as high as 1 percent, and individual shareholders in the company aren’t obligated to cover state taxes on their portions of the company’s income.
This advantage offers benefits to small S corporations whose annual revenues don’t pass the zero-tax threshold. In a sense, they work tax-free since tax isn’t established on the business itself or on the individuals who gain money from the business.
As companies grow from LLCS to S corporations and then ultimately a C corporation, so too will they be responsible to pay franchise taxes where they will follow the same zero-tax threshold rules mentioned above.
Limited Liability Company Taxes
LLC is the other common choice for small businesses. In most states, LLCs are entities that provide protection to business owners from some legal liabilities but give their incomes to those owners, who take care of the personal income tax instead of business income tax on their proceeds.
With S corporations, however, Texas goes against the national trend and charges the franchise tax to LLCs, which applies to every business type.
It is worth emphasizing that the income that goes to the owners as personal income isn’t imposed on state income tax in Texas.
Partnership and Sole Proprietorship Taxes
Most of Texas’ small businesses are partnerships that pay the franchise tax, whereas sole proprietorships don’t.
However, if a partnership is a business that is directly owned by individuals, meaning that the business income is distributed directly to them, partnerships and sole proprietorships are treated the same and aren’t charged the franchise tax.
The business owners are obligated to pay federal income tax on this income but not state tax, given that Texas doesn’t tax personal income.
Most partnerships in Texas, including LPs and LLPs, are assessed with the franchise tax.
The Virtual CFOs at Gonzalez & Arrambide are Available to Assist You
At Gonzalez & Arrambide, we offer our clients Virtual Chief Financial Officer (VCFO) services designed to help businesses manage their financial obligations efficiently without having the need of a full-time CFO, all at a reasonable rate that can save you a lot on startup costs.
Every dollar counts when it comes to running a business, and having an accurate report of your cash flow and how it is affected by taxes is crucial to staying afloat.
If you’re starting up a business, let us help you sort out all of the tax information and create a financial plan that is right for you.
Implementing processes to advance your organization’s long-term goals is one aspect of business management. However, one of the more critical components to running a profitable company involves strategic planning, or documenting and establishing a direction for your business, including assessing where you are and the direction it’s trending.
Strategic planning is not only an opportunity to record your organization’s mission, vision, and values, but to also lay out your business’ goals and to develop an action plan to achieve them. A well-prepared strategic plan will play a pivotal role in the growth and success of your business, and will offer leadership and support staff the means to respond to opportunities and challenges that arise.
Notwithstanding, the best-laid plans can sometimes go awry. When developing and implementing a strategic plan for your organization, there are ways to avoid making mistakes as you move forward.
Making the Right Decisions: Avoiding Mistakes in Your Strategic Business Plan
1. Employ an internal facilitator with experience leading planning sessions. An outside qualified consultant may offer the best way to run any planning sessions. An additional benefit of hiring an outside consultant is that they bring in an objective (and outside) perspective, while encouraging others to participate and offer their own opinion.
2. State your objectives clearly. Exercise a measure of structure and lay out objectives to avoid the session going off track. Clear objectives help guide sessions and offer a way for people to remain on task.
3. Establish an environment that invites trust and openness. Brainstorming as a group is critical, and it’s important to do so in an atmosphere free of judgment. On occasion, the most out-of-box ideas create meaningful change. Not offering an environment where participants are able to freely speak their minds may stifle great ideas.
4. Engage in follow-up for ideas from your strategy session. Strategic planning sessions involve taking leadership away from their busy schedules, so it’s important to utilize that time wisely and to implement action items that emerge from the session. Lack of execution is a common way to remain stagnant and miss out on opportunities to advance toward greater success.
5. Invite the right people to the planning session. Small group sessions offer opportunities to get things done more swiftly and with greater ease, whereas larger groups with more participants offer improved opportunities for great ideas.
The larger the group, the more responsibility a facilitator must undertake. Including individuals from different disciplines and levels of expertise who offer broader perspectives is a surefire way to develop strategies that are innovative and effective.
In summary, strategic planning sessions can help ensure your business advances in the direction you expect for success, but adopting the right framework and working with the right people are critical to a positive outcome.
Gonzalez & Arrambide, Inc., Offers Their CPA Services to Help Your Business Succeed
With 25 years as one of the most trusted and respected accounting firms in the Rio Grande Valley, Gonzalez & Arrambide, Inc., has guided individuals and businesses in addressing their financial and accounting needs.
Call us today at (956) 447-9009 and learn how we can help you grow your business!
As originally announced on The Wall Street Journal website, 6 out of 13 IRS-approved tax preparers failed cybersecurity tests in an audit commissioned by the nonprofit organization Online Trust Alliance (OTA).
Utilizing OTA’s 2016 Online Trust Audit methodology, alongside the IRS’s security mandates, the report revealed that nearly half of all online tax-preparation and filing services, whom had contractual agreements with the Internal Revenue Service, were unable to properly provide protection of customers’ privacy and security. Several of the larger corporations that failed to provide appropriate customer protection were Jackson Hewitt and Free1040TaxReturn.com. While TurboTax, H&R Block, and several others were named to an “Honor Roll” by the nonprofit.
Customer privacy and protection should naturally be at the top of every tax preparers list, and it is indeed a shocking revelation that so many IRS sanctioned companies were inadequately prepared for this responsibility.
But here at Gonzalez & Arrambide, Inc. customer protection is sought 100% of the time. Our highly experienced CPA’s recognize that the security of your financial documentation and information is a reasonable customer expectancy, and so our offices utilize the best practices to safeguard from hackers.
By keeping up-to-date on all vital national accounting information, our office is better prepared to serve you.
This includes following the effects of the OTA audit.
On July 6th, the IRS initiated its newest campaign intent on making tax-preparers more aware of the security risks that can lead to identity theft and tax fraud.
This public awareness campaign comes at the heels of June’s IRS Security Summit, in which IRS leaders met with representatives of leading tax preparation chains, software companies, and state tax authorities. During the assembly, the IRS released a fact sheet that set about some standards and methodologies by which to improve data security.
The “Protect Your Clients; Protect Yourself” campaign implored businesses and firms to follow a number of critical steps to safeguard taxpayer data including, but not limited to:
- Requiring stronger passwords on all tax software programs
- Storage of taxpayer data in secure systems and data encryption
- Improving security requirements for personnel working with taxpayer data
- Creating a plan about the required steps when notifying of a breach
- Completing risk assessments to identify potential system weaknesses
This attempt to simultaneously warn and help tax preparers is an essential element to curb the efforts of cyber criminals, as even the IRS themselves have been victims of hackers in the past. By improving their own cyber defenses and tax refund filters, the federal agency hopes to further enhance the security measures that tax preparation companies and software agencies should have in place for the 2017 tax season – essentially doubling up against cyber criminals.
Alongside this campaign, Gonzalez & Arrambide, Inc. urges all taxpayers to remain vigilant with their personal information and tax data as well.
A few tips include:
- Using security software with firewall and antivirus protection
- Encrypting sensitive personal and tax files on your computer
- Learning to recognize and avoid phishing emails
- Not carrying your Social Security card on you
- Being aware of thieves calling and posing as the IRS
- Remembering that the IRS does not initiate contact with you through email, text messages, or social media
At Gonzalez & Arrambide, Inc. the security of our clients’ personal data is of utmost importance. By keeping track of current trends and remaining guarded against cyber attacks, we aim to continue to provide the stress-free tax services that we are highly recognized for. Whether during tax season, or for any other financial purpose, our CPAs can offer you quality support and protection.
Give us a call today at (956) 447-9009 and let Gonzalez & Arrambide, Inc. serve you.