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
- 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
- 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.