When you're running a business, especially when you've got some particularly weird ways of doing so, it can be easy to forget that governments really like it when you pay tax. In fact, they like it so much that if you don't they tend to entirely shut down your business.
When I started my PR Firm, I thought I could do it alone, and did for one year until my head nearly popped off from stress and confusion. I'm also one of the easier cases, too--a few contractors here and there, simple accounting, a well-kept invoicing system--but the moment you start having multiple locations, contractors, assets and beyond, things get dicey. In the last two years I've learned, as a young businessman, some seemingly obvious but commonly-avoided practices, and pointed some potential landmines.
Hire an Accountant
No, really. I know it sounds stupidly obvious, but not everybody hires an accountant. I did so using Teaspiller, a site that was acquired by Turbotax, and it's not (just) because I'm incapable of basic form-filling. The truth is that there're things that you don't know about taxation (especially if you're a foreign national like me), and we all tend to make assumptions as entrepreneurs about what we can and cannot do.
I would really advise you also don't necessarily jump to one of the generic storefront tax operators. These firms usually have accountants who are a "jack-of-all-trades," lacking the specialty that an entrepreneur requires to do their taxes properly and efficiently. "Properly" in this case isn't just about filing the right forms, it's making sure you make the right deductions and organize your business intelligently and legally. For example, I eventually started working with Online Taxman specifically because I'm a British national running a startup in America, because they deal with ex-pats. Ask for referrals from friends, colleagues and even other companies.
Separate Business and Personal Expenses
It's really easy to just start letting the money roll into your personal account, but you'll eventually reach a point when this isn't a great option. You run the risk of the IRS viewing your business more of a hobby than an actual business, which means your tax liability will increase. As J.D. Roth (founder of personal finance blog Get Rich Slowly) notes in Entrepreneur, you'll be potentially falling into IRS audit potholes. Examples of this include using a business credit card for personal or writing off a spouse/friend during a business trip. The aforementioned having-an-accountant can help if you're already doing this, but you should understand the guidelines put in place by the IRS regarding deducting business expenses and keep separate bank accounts and credit cards.
Set Money Aside
One of the classical pitfalls of any business is to fail to account for disaster. That literally means both putting money aside for everything, from what your real estate costs to your actual taxes to a particular loan payment. The romantic world of startup suggests funding is available at every corner, but a run of bad luck--lost customers and a bad sales quarter for example--can strangle incoming revenue. More importantly, if you spend all of the money you make and fail to account for actually paying your taxes, you won't have either the state or the local taxes, which can bring up a litany of problems from multiple jurisdictions. Get an accountant.
There's very little excuse to not be organized in a world where Freshbooks, QuickBooks, Wave and Xero exist. These apps will essentially automate billings and invoicing, as well as generate reports for your accountant or your tax forms. Regardless of what you do, you need a filing system of any incoming or outgoing bills. Not having that will make you suspicious-looking to the IRS, and any potential audit or questions about your accounting hellish.
Define Your Actual Startup Costs
Simple math could either save you money, time or from ripping out your hair. It's simultaneously an obvious definition while being slightly obfuscated, but your startup costs are the expenses your business pays for prior to opening. Just to make that clear, that's before the business starts doing business. The increasingly muddled definition of "startup" may confuse you into thinking that means that when you're in "stealth," actually selling a product, that counts. You can deduct up to $5000 if your costs were $50,000 or less preparing for your business (EG: investigating the market, building software). The IRS.gov walkthrough is fairly comprehensive. It's also, other than a potential tax risk, an unexpectedly annoying cost. Serial entrepreneur John Rampton, when starting his latest company Hostt, found that just getting your business setup to operate as a legal business can cost upwards of $10,000 in the state of California.
Form the Right Corporation
Tax liability changes depending on what kind of company you have. Two of the most common are Limited Liability Companies (LLCs) and Subchapter S Corporations (S-Corps). LLCs are "designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership." S-Corps are "considered by law to be a unique entity, separate and apart from those who own it." While I and others argue that both are great options, there're pros and cons. If you aren't planning on selling stock (even privately), then the LLC is a better option. However, if you're planning on selling stocks or looking for investors, then you should consider the S-Corp. Furthermore, if you're a one-man shop hiring contractors, S-Corporations can avoid double-taxation (IE: you paying tax on both your personal and business returns).
Know Your Excise Tax
The IRS describes excise taxes as "taxes paid when purchases are made on a specific good." For example, if you have a delivery service that uses public highways and fuel, you may owe tax. As startups are getting more complex in when someone is "serving" a customer, so do the taxes.
Pay on Time
It's a very easy mistake to make when you're a first-time business owner to not pay your taxes on time--or at least file and pay something. Business Insider listed 12 possibilities that include seized property, penalty fees, social security seizure and in extreme cases jail time. The IRS will discuss options with you--but not if you fail to file anything.
Consider Other Options Besides An IRA
It's fairly common that small business owners start a Roth IRA. However, you can also contribute to an individual 401(k). J.D. Roth has found that "annual contribution limits are much higher than with an IRA--$17,500 in 2013 ($23,000 if you're 50 or older)--and you can make Roth 401(k) contributions with after-tax income." In short, more money for you.
Be Aware of The Full or Part-Time Status of Employees
As Uber has found, contractors and freelancers can be a sticky tax situation. Whoever you're hiring as a contractor, you want to make sure that you don't tax them individuals as full-time employees if they're not. Nolo.com has a good rundown of the IRS's full-time criteria, which considers whether that person works full-time or nearly full-time just for you, whether or not they have other employment and several other pieces.
The advice here--and with almost any tax situation--is never assume you can "get away" with something if you knowingly do it. Know as much as humanely possible about your tax situation, with or without the use of an accountant. Otherwise it may come back to haunt you.