Essential Tax Tips of Starting a Small Business

For those interested in starting a small business, here are the following five tax tips:

No. 1: Get an Employer Identification Number (EIN). "The very first step in getting a small business running is getting an EIN, which is used to identify a business entity," said Serna.

No. 2: Keep thorough records. "Once established, it is imperative to keep good records," said Serna. "This can actually help you save money, as good records will help you monitor the progress of your business, prepare your financial statements, identify sources of income, keep track of deductible expenses, keep track of your basis in property, prepare your tax returns, and support items reported on your tax returns."

No. 3: Know your tax obligations. "If you have employees, you must know your tax obligations and familiarize yourself with the different types of employment taxes, such as Federal income tax, Social Security and Medicare tax, and Federal unemployment tax," said Serna. "If independent contractors are paid, you must file a 1099-MISC to report payments for services performed for your trade or business."

No. 4: Understand taxable and nontaxable income. This may be received in the form of money, property or services. Generally, an amount included in one's income is taxable unless it is specifically exempted by law. Income that is taxable must be reported on a tax return and is subject to tax. Income that is nontaxable may have to be shown on a tax return, but is not taxable.

"Generally, you must include in gross income everything you receive in payment for personal services," said Serna. "In addition to wages, salaries, commissions, fees and tips, this includes other forms of compensation such as fringe benefits and stock options. If you provide child care, either in the child's home or in your home or other place of business, the pay you receive must be included in your income."

No. 5: Determine how to report your income. "If you rent out personal property, such as equipment or vehicles, how you report your income and expenses is generally determined by whether or not the rental activity is a business, and whether or not the rental activity is conducted for profit," said Serna. "Generally, if your primary purpose is income or profit and you are involved in the rental activity with continuity and regularity, your rental activity is a business."