When does a startup company have to start paying taxes?
I want to start a record label eventually. For now I'm wanting to sell beats and merchandise. Do I have to pay taxes? What if I'm making little to no money at first?
As others have stated here, you need to start paying taxes immediately on any income earned by your company (no matter how little it is). If you think you may be behind on tax payments, the Business.com team recently published a guide on how to get your business caught up. There are resources and professionals available to help you communicate and negotiate with the IRS on what is owed in unpaid taxes. This guide can help you avoid additional fines while you sort out your finances: What to Do If You're Behind on Your Taxes
Like anything in the tax world, it depends on many things, but I'm going to go one the assumption that your business is set up as sole proprietorship or single-member LLC, owned 100% by you. If your business is making no money, then there would be no federal or state tax liability. If your business starts to turn a profit, at the bare minimum you would pay the 15.3% self-employment tax on the profits (IF you are set up as a sole proprietorship or single-member LLC, or a partnership), because this income would simply pass through to your personal tax return as self-employment income.
Also, if you are set up as anything other than a sole proprietorship, just about every state requires you to pay an annual fee for the privilege of operating an entity in the state, whether the business makes any money or not. New Jersey for example charges a $50 annual reporting fee for all LLCs, partnerships and corporations - profitable or not.
If you specify what state you're in and how you want to set up your entity as, I can give you a better answer.
Hi Shania. There are a few different taxes to consider. Federal and State taxes, and how you pay for those will depend on your business form, ie Sole Proprietor, Partnership, Corporation, S-Corp..etc. I will speak on Sole Proprietor as it is by far the easiest and cheapest form you can choose and I am assuming you are in business for yourself which is also a whole lot cheaper than having partners. Typically the first tax you will pay will be the fee for registering your Doing Business AS (DBA) Name. Once again, this depends where you live. I live in GA and the counties are responsible for DBA Name registration. Yours may be different. You will probably need the DBA name to open a traditional business checking account(although paypal doesn't ask for proof) and to make sure you have a unique business name in your locality. As a sole proprietor, the Federal and State taxes will be a part of your personal tax return. Its not uncommon for people to actually experience a tax benefit from owning a business as they are able to take deductions for business expenses, but those expenses they may have had even without the business, ie cell phone, internet, home office etc. Anything you use for business get a receipt, track it on a spreadsheet and take it to your tax professional at the end of the year. There are a such things as payroll taxes but if you don't have any employees then you don't have to worry about these. Then there are local sales taxes. Is the sale of the right to use your beat taxable? The general principle is that If you are selling this beat to another business, so that they can use to build a complete album for sale to the public then there should not be any sales tax.
I believe you will have to start paying right away as that has been my experience. But best thing to do is to consult with a tax accountant to be extra sure.
Be sure your bookkeeping is set up ASAP and record any expenses you may incur prior to selling merchandise. When you file your year-end returns your tax accountant will need these numbers.
As soon as you start selling merchandise, you will need to collect taxes as part of the purchase and remit those to the appropriate taxing authority. You won't pay income tax until you have received income. Talk to a bookkeeper about the best way to record your expenses prior to selling merchandise and setting up your books properly
If what you are selling is subject to sales tax, then you need to collect and pay sales tax on your sales. (Actually, your customers are paying the tax, but you are collecting the tax on behalf of your local taxing authority). If you have employees, you must collect and pay taxes on their salaries. Then, when it comes time to filing your annual tax return, you will have to pay taxes on your profits, whether you are sole proprietor, partnership or corporation. Adam had the best advice, consult a tax professional.
Assuming we are talking US taxation, income tax is typically based on profits or taxable income. That means if you have not made a profit, then you will probably not owe income tax on the business. It does not; however, mean you don't have to file a tax return because an income tax return is required if you have any revenue. With most startup businesses you will want to file the tax return, because it is common for new businesses to have a loss at first and you want to file your tax return so you can report that loss and carry the loss forward to offset profits in future years.
Income tax is not the only tax you have to worry about with a business. If you are selling tangible items you will likely have to collect and pay sales tax to your home state. You may also owe ad valorem tax on inventory or any physical assets owned by the business. Also if you have any type of legal entity set up such as an LLC or corporation, you will probably need to pay franchise tax for that entity and if you have any employees you may owe employment taxes.
I concur with Adam Brewer, schedule a chat with a tax professional to be sure you are in compliance with all the tax reporting requirements you may have.
Before I start I will say that you should always consult a tax professional for these types of questions.
It doesn't matter how much or how little you sell, you pay taxes immediately and on any income. As a business owner / freelancer, you actually pay a higher tax rate than as an employee.