What Are the Tax Implications of Starting a New Business?

By Greg Grzesiak Greg Grzesiak has been verified by Muck Rack's editorial team
Published on June 1, 2023

Starting a new business comes with various tax implications. To help you navigate this complex area, we’ve gathered insights from eight business leaders, including VPs, founders, and executives. From registering with the IRS to acquiring a TIN, these experts share their knowledge on the tax implications of starting a new business.

  • Register With the IRS
  • Explore Tax Incentives and Credits
  • Deduct Startup Costs Carefully
  • Manage Payroll Tax Responsibilities
  • Prepare for Self-Employment Tax
  • Understand Various Business Taxes
  • Choose Your Business Structure Wisely
  • Acquire a TIN From the IRS

Register with the IRS

One tax implication of starting a new business is the need to register with the Internal Revenue Service (IRS). This includes obtaining an Employer Identification Number (EIN) and submitting paperwork to register the business. Business owners must also ensure they understand any relevant state and local taxes, such as sales tax or payroll tax. It is important to stay up to date on tax laws and filing deadlines to avoid penalties.

Ranee Zhang, VP of Growth, Airgram

Explore Tax Incentives and Credits

When starting a startup, it is important to be aware of any specific tax incentives or credits that may be available. Governments often introduce tax incentives to encourage entrepreneurship and economic growth. These incentives could include tax breaks for certain industries, regions, or activities, such as research and development.

Tax incentives for new businesses can provide significant benefits. Examples include startup tax credits that offset initial costs like research and development or employee training. Investment tax incentives attract investments in specific regions or industries through tax breaks or deductions.

Governments may also offer tax incentives for job creation, encouraging businesses to hire and expand their workforce. Some jurisdictions provide tax abatements or exemptions for a certain period, reducing the tax burden on new businesses. Taking advantage of these incentives can help new businesses thrive and contribute to economic growth.

Jonathan Merry, Founder, Moneyzine

Deduct Startup Costs Carefully

When starting a new business, you can deduct some expenses you incur before the business starts generating revenue, such as those related to market research, legal fees, and advertising. These startup costs can only be deducted up to $5,000 in the first year of business, and the rest must be amortized over the next 15 years. 

If your business never becomes operational, these startup costs cannot be deducted at all. It is important to keep clear records and seek professional advice to ensure you are maximizing your deductions while staying in compliance with tax laws.

Tarun Saha, Co-founder and CEO, StallionZo

Manage Payroll Tax Responsibilities

Payroll tax is one of the main tax implications of starting a new business. Payroll taxes are the taxes that a new business owner pays on their employees’ wages; these taxes include Social Security and Medicare taxes, as well as federal and state unemployment taxes.

You will be responsible for calculating and paying payroll taxes on the compensation of your employees. It is your responsibility as an employer to withhold a portion of your employees’ paychecks and remit them to the government. Penalties and fines can be hefty if you cannot do so.

It’s imperative to stay up-to-date on your payroll tax obligations, as tax laws change frequently. There may be certain tax breaks and incentives available to start-up businesses, such as the Work Opportunity Tax Credit. These breaks can help offset payroll taxes. It’s crucial to plan for and manage payroll taxes properly as a first-time business owner.

Hamid Uran, Head of Marketing, PCB Assembly

Prepare for Self-Employment Tax

One of the tax implications of starting your own business is becoming subject to self-employment tax. Once you’re self-employed, you become accountable for both employer and employee contributions toward Social Security and Medicare taxes that make up this type of taxation.

Unlike employees whose paychecks contain these deductions, self-employed individuals must calculate and pay these on their own, which typically is higher than what employees and employers collectively contribute.

Therefore, it’s crucially important that when entering this realm, you plan for compliance while budgeting accordingly for the additional tax liabilities that come with being self-employed!

Shaun Connell, Founder and CEO, U.S. Dictionary

Understand Various Business Taxes

There are a lot of different taxes that you may be liable to pay if you start a new business – but in the end, it really boils down to the type of business you are starting and its size. A sole proprietorship will often only have income taxes to be paid.

With other corporate business structures, however, there come implications like payroll and employee taxes. You’ll need to ensure you withhold the correct amount for tax deductions before the employee’s salary is paid out into their account. Payroll taxes are ‌also required—which are used for funding things like Medicare and Social Security.

Joe Flanagan, Founder, 90s Fashion World

Choose Your Business Structure Wisely

Entrepreneurs must choose between sole proprietorships, partnerships, limited liability companies (LLCs), S corporations, or C corporations, each with its own tax ramifications. For instance, while a sole proprietorship is relatively simple to establish and manage, it exposes the owner to unlimited personal liability and may not provide the desired tax advantages.

An LLC or corporation can offer limited liability protection and more favorable tax treatment, but requires additional administrative compliance. New business owners must carefully evaluate the tax implications of their chosen business structure to optimize potential savings and ensure compliance with all applicable tax regulations.

Michael Lazar, Executive, ReadyCloud

Acquire a TIN from the IRS

One of the tax implications of starting a new business is that the business owner will need to register for and acquire a tax identification number (TIN) from the Internal Revenue Service (IRS). This TIN is used for identifying the business for tax and is required for filing taxes, opening a business bank account, and hiring employees. 

Mike Podesto, Founder and CEO, Find My Profession

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By Greg Grzesiak Greg Grzesiak has been verified by Muck Rack's editorial team

Greg Grzesiak is an Entrepreneur-In-Residence and Columnist at Grit Daily. As CEO of Grzesiak Growth LLC, Greg dedicates his time to helping CEOs influencers and entrepreneurs make the appearances that will grow their following in their reach globally. Over the years he has built strong partnerships with high profile educators and influencers in Youtube and traditional finance space. Greg is a University of Florida graduate with years of experience in marketing and journalism.

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