The tax man cometh: the IRS wants a piece of your new business

Black Enterprise, Sept, 1996 by Tonia L. Shakespeare

Ah, the glamorous life. No more punching the clock. No more annoying co-workers. And as for money--well, it's yours for the taking. As many would say, life for the self-employed is "all good." The Internal Revenue Service even has a welcoming committee that specifically addresses the fiscal needs of the budding business owner. Its first gift--a luxurious 15.3% self-employment tax.

Unlike the little drummer boy, the IRS has a plethora of gifts to bring. If you're starting a business, you need to be especially aware of its offerings. For starters, there's payroll tax. Say you hire someone in New York State for $8 an hour, Social Security tax at .0765% and unemployment insurance tax at 4.4% on earnings up to $7,000 will be affixed. In addition, you'll have to pay premiums on workmen's compensation and disability insurance. If you factor that you'll be spending between 12% and 15% on taxes and benefits, what you're actually paying employees is $9.20 an hour.

Sales tax is another offering from the state. As the owner of a retail business, you would be required to collect taxes on items sold. As a business owner, you should immediately record sales tax and place the funds in a separate account, advises Randy Blaustein, an attorney and senior tax partner at the New York City accounting firm of Blaustein, Greenberg & Co.

Too often business owners make the mistake of depositing money from sales tax into their business checking account, using it to pay bills. This places your business at considerable risk if you fall short when payments are due, Blaustein warns. "The money does not belong to the business owner, it belongs to the state."

There are ways to thwart Uncle Sam's overtures. Simply put--deductions. You can deduct what the IRS states is "ordinary and necessary" to the operation of your small enterprise. Do you need to buy office equipment and furniture? You can deduct the first $17,500 from your first year earnings. Does conducting business mean that you have to drive? If so, you may be entitled to a deduction of up to 100%. Do you subscribe to trade journals, magazines or newspapers? Entertain clients? Attend out-of-state conferences? If you participate in any of these activities you can claim deductions and reduce your tax liability.

Do not, however, claim deductions for expenses unrelated to business. Treating yourself to dinner does not fall under the category of entertainment expense. Nor is a personal vacation to the Bahamas business travel. Remember, the onus is on you to convince the IRS that you have a right to a deduction.

To ease your tax burden, set aside a certain amount of money each month for federal and self-employment tax (due each quarter) and keep abreast of current laws and tax regulations.

For tax advice and free small business tax guides, contract the IRS at 800-829-1040 or 800-829-4477; or http://www.irs.ustreas.gov.