One major key to a successful business is understanding your tax obligations. Before you explore becoming a new booth or salon suite renter or opening a salon, there are a few tax matters you should be familiar with.
Listed are five tax tips that will help you stay out of trouble with the IRS and help your business get off to a good start:
1. Business Structure
Once you decide to start a business, the next step is to decide on a business structure. The most common structures are sole proprietorships, partnerships, and corporations. Each of these business structures can be broken down a little further.
2. Employer Identification Number (EIN)
Getting an EIN is optional for certain business structures. Partnerships and corporations are required to have an EIN. A sole proprietor or single-member LLC is only required to have an EIN if they have employees; otherwise, it is optional for them.
3. Accounting Method
Accounting methods are rules used to determine when to record income and expenses. A consistent method must be used by the business. The two most common methods are the cash and accrual methods. The difference between cash and accrual accounting lies in the timing of when income and expenses are recorded. Cash accounting recognizes income and expenses only when money changes hands, while accrual accounting recognizes income when it’s earned (not when it is received), and expenses when they’re billed (but not paid).
4. Business Taxes
The type of taxes your business is required to pay depends on the type of business structure you choose. Generally, there are four types of business taxes that beauty professionals should be aware of:
a) Income tax – Income tax is paid on the net income of a business. Net income is the remaining income your business has after all expenses have been paid. Gross income minus total expenses equal net income.
b) Self-employment tax – Self-employed people generally pay self-employment tax as well as income tax. Self-employment tax, also know as SE tax, is Social Security (FICA) and Medicare tax paid by the individual. This is the same tax that your employer (if you were an employee) would automatically withhold from every paycheck you receive. This tax is not optional. Everyone is required to pay FICA and Medicare tax. SE tax is 15.3% of your net self-employment income. It is due and should be paid every quarter. If you do not pay your SE tax every quarter, you will be slapped with a penalty when you file your tax return at the end of the year. Remember, booth renters and independent mobile stylists are self-employed business owners just like any other business owner so all these requirements pertain to you.
c) Employment Tax – Employment tax is paid by employers on behalf of their employees. Employers withhold FICA and Social Security tax from their employee’s paychecks. The employer is responsible for depositing employment taxes with the IRS. Not doing so can create serious problems for the business. The penalties for not complying with employment tax requirements can be as high as 100% of the undeposited amount.
d) Sales Tax – Sales tax are taxes imposed by your state on the sale of product. Some states also impose sales tax on services. Make sure you contact your state’s Department of Revenue to find out their sales tax requirements and when your sales tax return is due.
5. Quarterly Estimated Taxes Payments
Anyone in business that files a tax return is required to pay quarterly estimated taxes. If your self-employment income tax and your income tax combined is $1,000 or more ($500 for C corporations), you are required by law to make quarterly estimated tax payments. You can base your estimated payments on your prior-year tax liability, or by calculating your payment based on your current year income. Payments are due on the 15th day of April, June, September, and January. If the 15th falls on a holiday or weekend, payments are due on the next business day.
By Desarie Anderson, CPA to Beauty Professionals