Being an entrepreneur does not exempt you from paying taxes. Tax laws may be complicated and confusing, but you are responsible for those related to your business.
The Internal Revenue Service (IRS) allows deduction of all legitimate business expenses (with a few exceptions) as long as they meet three rules:
- The expenses must be incurred in connection with your business.
- The expenses must be “ordinary and necessary.”
- The amounts must be “reasonable.”
Become familiar with which expenses are deductible. The IRS has free publications, which can answer many of your questions. You need documentation of expenses in case you are audited. Tax laws change from year to year. An accountant can help you be aware of those changes that affect your business.
There is tax help available on the Internet, including complete access to the U.S. Tax Code. You can also go directly to the IRS or other tax resources. A partial listing of free IRS publications for business owners includes:
- Circular E: Employer’s Tax Guide (#15)
- Tax Guide for Small Business (#334)
- Tax Withholding & Estimated Tax (#505)
- Tax Calendar (#509)
- Self-Employment Taxes (#533)
- Depreciation (#534)
- Business Expenses (#535)
- Accounting Periods and Methods (#538)
- Starting a Business and Keeping Records (#583)
- Business Use of Your Home (#587)
- Business Use of a Car (#917)
- Business Reporting (#937)
You will probably be responsible for other taxes besides federal. Depending on the business, there may be sales tax on your products. Some products, such as cigarettes, alcoholic beverages, etc., require a special tax or fee.
You also have to pay state and any local taxes. Businesses with employees must pay disability and unemployment insurance tax. If you have employees, you must have a Tax ID number.