New Business Checklist
Employer Identification Numbers (EIN)
Do you need a Tax ID Number?
You must have an employer identification number (EIN) if your business fits any of these situations:
- You are a corporation or partnership
- You pay wages to one or more employees
- You file pension and excise tax returns
Apply Online
This Internet EIN (I-EIN) application opens another avenue for customers to apply for and obtain an employer identification number. Once you have completed all necessary fields on the online form, preliminary validation is performed and will alert you to information IRS needs that you may not have included. An EIN will be issued after the successful submission of the completed Form SS-4 online. Please note that not all business entity types may use this method.
Apply online here: IRS small business EIN.
Hiring Independent Contractors vs. Employees
It's important to distinguish between employees and independent contractors since the IRS differentiates between the two and requires that businesses properly classify workers. One test you can use to distinguish between an independent contractor and an employee is to determine how much control and independence the worker has over determining their work schedule and completing their job. In general, employees are provided with more direction and equipment to do their job than independent contractors. You don't incur payroll taxes nor do you have to file payroll tax returns for independent contractors. At the end of the year you file Forms 1099-MISC and 1096 with the IRS to report payments to independent contractors. Similarly, you file Forms W-2 and W-3 with the IRS to report payroll payments to employees. Other payroll tax returns are required to be filed, and payroll deposits made, at different intervals during the course of the year.
For IRS information on how to classify workers see Classifying Independent Contractors and Employees.
For NH Department of Labor information on how to classify workers, see NH DOL Criteria for Independent Contractors. This affects the need for workers' compensation coverage for workers that you may be classifying as independent contractors.
For more information, review IRS Publication 15 Employer's Tax Guide.
State of New Hampshire Reporting Requirements
The State of New Hampshire requires that you use a New Hire Reporting Form to report the name, address, Social Security number and date of hire of any new or rehired workers. Please remember that this form is used to identify any new or rehired employees and independent contractors. For more information refer to the NH Employer Handbook or Reporting Independent Contractors Under the 'New Hire' Program.
If you need these forms or you're unable to download them please contact my office.
Tax Planning
A new business may experience a loss in its first year. Such a loss reduces the business's tax liability. Start-up costs and initial asset purchases often result in a loss in the business' first year. Be aware that start-up costs may be eligible for amortization
Estimated Quarterly Tax Payments
In the first year of business, there is an alternative to paying quarterly estimated tax payments: Base your tax estimates on your income as you earn it. For example, if you have a loss in the first half of the year, delay your estimates until you start showing a profit. This method requires that you keep track of your monthly net income (or loss). File Form 2220 (or Form 2210 for sole proprietors) with your tax return next year to report how your quarterly income (or loss) was earned during the tax year. This is called using the annualization method for computing your tax estimates. Computer programs like QuickBooks can be helpful in estimating this quarterly net income.
Self-Employment Taxes
Remember to compute self-employment tax on your new business income, if your business is a sole proprietorship or a single member LLC filing Form 1040-Schedule C. Self-employment tax (social security tax on business income) can often exceed the federal income tax. You can estimate this tax by multiplying the net income of the business by 15%.
For more information on self-employment tax, see IRS Topic No 554 Self-Employment Tax.
Accounting Methods for Your Business
Accrual Basis
Accrual Basis is a method of bookkeeping in which you regard income or expenses as occurring at the time you ship a product, render a service, or receive a purchase. Under this method, the time when you enter a transaction and the time when you actually pay or receive cash may be two separate events. Under the accrual method, you record income when you earn it (even though you may not receive payment until later), and you record expenses when you incur them (even though you may not pay them until later).
Note: If your annual sales are greater than $1 million and you carry inventory in your business, you must:
- Use the accrual method of accounting.
- Deduct your inventory expenses only when you sell those items, rather than when you buy them.
Cash Basis
Cash Basis is a method of bookkeeping in which you regard income or expenses as occurring at the time you actually receive a payment or pay a bill. A cash-basis report shows income only if you have received it, and expenses only if you have paid them. For example, if you have not yet received a payment for an invoice, a cash-basis report on your sales will not include the amount of the invoice. Under the cash method of accounting, income is recorded when you actually receive it, and expenses are recorded when you actually pay them. Buying Assets In lieu of depreciation, business taxpayers may elect to immediately expense (IRS Code Section 179), rather than depreciate, a certain dollar amount of the total price of equipment or furniture purchased each year, with certain limitations. With limitations, this also applies to business vehicles. For more information, see Expensing Vehicles. For tax year 2003, this total was $100,000. If you have a loss from your business, see the first bullet below. If your business is showing a loss, you may run into some limitations when expensing your equipment purchases. However, you can include any business income, including wages, when figuring whether you have a loss from your business income. For tax year 2003, the $100 000 amount was reduced if you purchase more than $400,000 worth of equipment during the year. Keep track of your start-up costs (those costs you incur before you are ready to receive customers) separately. These must be deducted over 5 years, instead of expensing them in the first year of business.
Record Keeping
Keep business and personal transactions separate. To easily achieve this, set up a separate business bank account for all business transactions. If you use a credit card for both business and personal expenses, indicate on the credit card statement which items are related to your business. Consider using a program like QuickBooks to help you keep track of all your business income and expenses. Many self-employed individuals pay too much tax because expenses are easily lost or forgotten.
Deductions
Deductions That Require Special Record Keeping
Business Meals & Entertainment
A business purpose is required for these expenses to be deductible (and only 50% of the total expense is deductible). A deductible meal is usually with a business contact. An entertainment event usually follows a business meeting. For record keeping purposes, write on the receipts whom you met with, as well as the business purpose of the meeting. Save these receipts with the rest of your tax records.
Auto Expenses
Keep a written record of all of the miles accumulated for business purposes, including:
- Starting and ending mileage
- Dates of travel
- The business purpose of each trip
Employees and sole-proprietors have the option to use the standard mileage method, where the automobile deduction is computed at a flat rate per business mile, instead of the actual auto expenses (depreciation, gas, repairs, insurance, lease, etc., selecting the most advantageous deduction. Employees and sole-proprietors who want to use the standard mileage rate in the future, must use that method for the first year (unless they choose to depreciated their vehicle under the straight-line method). Sole-proprietors who lease may use the standard mileage method, but they must do so for the entire lease period. Note: Employers, such as corporations and partnerships, may not use the standard mileage method. See Business Use of Autos for further information.
Retirement Planning for Sole Proprietors
Self-employment offers you additional retirement savings options.
Advantages:
- You can deduct contributions you make for yourself.
- Earnings are tax-free until they're distributed.
Requirements to consider before selecting a self employed retirement plan:
- Deadlines for setting up the plan are usually December 31st or your tax return due date
- Contributions deadlines are usually either December 31st or your tax return due date
- Whether employees must be covered under the plan
- Whether contributions are mandatory or elective
- The minimum or maximum contributions allowed
- The amount of the contributions you're allowed to deduct
- Administrative costs
For more information, see IRS Publication 560 Retirement Plans for Small Business.
Home Offices for Sole Proprietors
Benefits of a home office include additional tax savings. Some personal household expenses may be considered deductible business expenses. Most home expenses become, at least in part, deductible. Home expenses are deducted based on the percentage of the total size of the home the office occupies. To qualify, a home office must be used exclusively for business and be the primary location for managing a business. Examples of these expenses include: mortgage interest, property taxes, insurance, utilities, depreciation, repairs and maintenance.
For more information, see IRS Publication 587 Business Use of Your Home.
Year-end Documents
- Forms 1099
- Forms 1099 you receive
- For service businesses, customers who pay more than $600 should mail you Forms 1099-MISC. If you don't receive one, the income should be reported anyway.
- Forms 1099 you issue
- Prepare Forms 1099-MISC for each of those to whom you pay more than $600 for services (excluding corporations).
Remember to get social security numbers from your contract workers, along with their addresses. You'll need that information when you complete their Forms 1099-MISC.
For more information, see IRS Publication 334 - Tax Guide for Small Businesses.
For the main URL address for IRS forms and publications, go to IRS Forms and Publications.