If you plan to start a new business as an owner-operator, it's important to know your federal tax responsibilities. Here are six basic tips that can help you get started:
- Type of Business. Early on, you'll need to decide which type of business you're going to establish. The most common types are sole proprietorship, partnership, corporation, S corporation and Limited Liability Company. Each type reports its business activity on a different federal tax form. ATBS, the largest business services provider for independent contractors in the U.S., recommends to almost every client to form an LLC. It's critical to understand the business structure options available and when each is most appropriate for your business. ATBS can advise you when a structure change is appropriate for your business.
- Types of Taxes. Running a business as an owner-operator will determine the type of taxes you pay. The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax.
- Employer Identification Number. A business often needs to get a federal EIN for tax purposes. Check IRS.gov to find out whether you need this number. If you do, you can apply for an EIN online.
- Recordkeeping. Keeping good records will help when it’s time to file your business tax forms at the end of the year. Records help track deductible expenses and support all the items reported on your tax return. Good records will also help monitor your business’ progress and prepare your financial statements. You may choose any recordkeeping system that clearly shows your income and expenses or you can use a business service provider that specializes in the business of trucking to help with your recordkeeping needs.
- Accounting Method. Each taxpayer must also use a consistent accounting method, which is a set of rules that determine when to report income and expenses. The most common are the cash method and accrual method. Under the cash method, you normally report income in the year you receive it and deduct expenses in the year you pay them. Under the accrual method, you generally report income in the year you earn it and deduct expenses in the year you incur them. This is true even if you receive the income or pay the expenses in a future year.
- Hire a tax advisor. Make sure you have a qualified tax and accounting service provider who specializes in the transportation industry. Bad advice can cost you more money and create long-term headaches.
For more information, check out the “Business Taxes” page on IRS.gov or visit ATBS.com.