So you've started a new business and hired an attorney to make sure that your business is properly formed in order to give you some liability protection. What is the next step?
Another important step in the process is making sure that you follow all the proper federal and state tax laws as the failure to do so could result not only in liability for your new company but also for you personally. Besides just filing annual returns, there are also a number of other requirements.
Below is a list of some of the major items to consider when starting your business:
- Sales and Use Tax. Are the goods or services you are selling subject to Iowa sales or use tax? The Iowa Department of Revenue has posted an Iowa Sales and Use Tax Guide to help business owners determine if they need to pay for these taxes and how to go about getting a permit to collect such taxes or an exemption certificate to give to suppliers to purchase items without paying the sales tax.
- Employee v. Independent Contractor. Will your workers be classified as Employees or Independent Contractors? There is a big tax difference between those two classifications. Generally for employees you must withhold income taxes and pay Social Security and Medicare taxes and unemployment tax on wages but you do not have to pay these items on payments to independent contractors. The problem with misclassifying individuals who do perform work for you is that the company may ultimately be liable to pay the employment taxes for the misclassified worker.
- Employee Withholdings. Will your business have employees? If so, each employee will need to fill out a Form W-4 at both the federal and state level to determine how much to withhold from each employee's paycheck for state and federal income taxes. In addition to just withholding amounts for federal and state taxes, employees and employers are required to withhold amounts for Social Security and Medicare taxes and remit payments in a timely manner. Your new business will then need to make sure to comply with all filing and deposit requirements of such withholdings to the IRS and Iowa Department of Revenue.
- Estimated Tax Payments. Are you required to make estimated tax payments? If you receive income from your business that is not subject to withholding, you may be required to pay estimated income tax at both the federal and state level. Typically this applies to self-employed individuals or individuals that receive large amounts of interest, dividends, capital gains, rents, royalties, business income, or farm income.
In addition to these items, Iowa also has unemployment tax and employer's can set up an account through Iowa Workforce Development. The IRS also has some additional guidance for new start-ups on their website.
It is much easier and less costly for new businesses to make sure they are complying with all tax laws in the formation stage rather than waiting until they receive a notice from the IRS or Iowa Department of Revenue for failure to comply with such rules and regulations. Penalties and interest can be very steep and tax debts may not be dischargeable in bankruptcy.