Selling a few items on Ebay or Etsy may not create large and complex tax scenarios but your business doesn’t have to be very large before you have additional tax rules to follow and understand. Some small business owners pay more taxes than they should while others find themselves in tax trouble. The IRS won’t accept your excuse of not having knowledge of the tax laws involving your business and that makes these considerations very important to understand.
Regardless of the size of your business, you should register it in the state where you live but knowing the type of registration is sometimes difficult. In most cases, small businesses should register as a Limited Liability Company or LLC. An LLC allows all of your business income to pass through your company allowing you to claim it only once on your personal taxes.
In contrast, a C Corporation is double taxed. First, the business pays taxes and then the owners pay taxes again on the money they earn but some businesses are required to register as C Corporations. If all of this sounds confusing, consult a business registration service to help you make the right choice.
A typical American family making a modest income with the basic deductions doesn’t throw up any red flags to the IRS but as soon as that family starts a business, the IRS takes notice. Any expense you plan to write off on your business taxes must have a receipt to go with it. Any books or magazines related to your field, computers and other equipment, software, consultants, and mileage are all deductible expenses but not without receipts. Go in to every year with the belief that you will be audited. Consider scanning and saving all receipts and documentation.
Speaking of Software
Before opening your business, have a plan for how you will handle accounting and bookkeeping. Software packages like Quickbooks are inexpensive and will streamline these tasks but consider having somebody help you set up the software at the beginning. Setting it up correctly at the beginning will avoid the costly task of fixing problems later.
Some business activities are appropriate for the do it yourselfer but IRS compliance may not be one of them. If you feel overwhelmed, get help from an accountant or tax attorney and start your business off right by putting your business registration in the hands of a registration service.