There are 32.5 million small businesses in the U.S., with small businesses accounting for 64% of new jobs each year. If nothing else, the number of small businesses indicates how many of us want to be the captains of our own destinies.
And while jumping into business headfirst can be exhilarating, it can also be risky -- especially if we don't know enough about what's legally expected of us.
Here are six basic tax-related issues all small business owners should know.
1. You need an EIN
All business owners need an Employer Identification Number (EIN), even if they don't plan on hiring employees. The IRS assigns EIN numbers that are used precisely like Social Security numbers when it's time to file taxes, make tax payments, or open a business bank account.
Action: Apply online for a free EIN. If you're ever asked to pay for this service, you know you've stumbled onto a for-profit business site. Navigate to the official IRS site instead.
2. You should never commingle personal and business income
The easiest way to short the tax man is to mix your business income in with your personal income. If you're someone who mixes business and personal income, don't be surprised if the IRS decides to take a closer look at your personal accounts to make sure it's getting everything it's owed.
Action: Open a separate bank account and business credit card for your business expenses.
3. Sometimes, your best bet is to hire tax help
If you aren't familiar with the ins and outs of taxes, make sure there's money in your business account to hire an accountant with experience in small business taxes. This person should stay in contact with you throughout the year to track income and expenses, monitor your gross and net profits, and ensure you don't run into a cash flow problem.
Action: Interview a few accountants who specialize in business accounting.
4. While you're at it, hire payroll help
If you have employees, consider also hiring a reputable company to assist with payroll. A top-notch payroll company will remit payroll taxes when they're due and make sure you're not on the hook for more money at the end of the year.
Action: Ask other small business owners if they work with a payroll company they're happy with. Interview two or three before deciding which one you can trust your payroll details to.
5. It doesn't pay to get messy with finances
All income must be reported to the IRS. It's that simple. Any hints that you've failed to report income raises a red flag with the IRS.
Action: Keep careful records throughout the year. It's easy to get busy and legitimately forget about a job you did, but careful recordkeeping can help you avoid those lapses.
6. You need to know your business classification
Small businesses can be classified as a C Corporation, S Corporation, Limited Liability Partnership, Limited Liability Company, Single Member LLC, or Sole Proprietorship. Here's the deal with all of these different classifications: They are each taxed differently. Failing to properly classify your businesses at tax time may result in overpaying or underpaying, and you certainly do not want to do that.
Action: Be clear about which classification your business belongs under.
Few things are more satisfying than getting your own business off the ground. However, entering into that business with a solid understanding of your tax obligations can only make the road ahead a little smoother.
This article was written by Dana George from The Motley Fool and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to firstname.lastname@example.org