As with most things in life, starting a business has its advantages and disadvantages. Advantages include being your own boss, not having to request vacation time and, and the ability to come and go as you please. Ironically, being your own boss is also one of the biggest disadvantages of owning a business -- for some of the same reasons. As your own boss, you will have many responsibilities (many of them learned on the job) and may not have much time for vacation.
A small business owner typically assumes the roles of human resources manager, chief financial officer, head of sales, and general manager. Since you'll have to wear so many hats, it's good to have a basic understanding of these different disciplines within a business operation. This article will provide you with some common taxation and accounting terms to help you navigate a difficult area of business.
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Accounting Methods: These are the basic guidelines and rules businesses use to keep financial records and prepare financial reports. The two most common types of accounting methods are accrual basis and cash basis.
Accrual Basis: In this type of accounting method, expenses are deducted in the year that they are incurred and income is reported in the year it is earned.
Cash Basis: This type of accounting method has income reported in the year it is received and expenses deducted in the year they are paid.
Employer Identification Number (EIN): This is a number assigned to employers by the federal government. The EIN is used to identify the tax account of employers. Generally, most business structures are required to obtain an EIN.
Employment Tax: Federal income tax withholding, Medicare tax, Social Security tax, and federal unemployment tax that every employer must withhold and submit on behalf of their employees.
Excise Tax: A tax that must be paid if a business manufactures or sells certain products or uses certain kinds of equipment, facilities, or products.
Information Tax Return: A return that reports the income or loss of a business that is not subject to tax itself. Examples of business structures that would file an information tax return are partnerships, limited liability companies, and S corporations.
Sales Tax: Tax on the sale and purchase of goods that is imposed by state and local governments.
Self-Employment Tax: A Social Security and Medicare tax that self-employed individuals are required to pay.
Tax Year: The annual accounting period for reporting income and keeping records. There are two types of tax years – the calendar year and the fiscal year. A calendar year runs from January 1st until December 31st, while a fiscal year runs for twelve consecutive months ending on the last day of any month (except December).
Get Legal Help to Better Understand Taxation and Accounting Terms
There are various laws and regulations that companies must comply with when it comes to structuring their business and its operations. If you have questions about taxation or accounting terms, or would like help navigating through your business tax obligations, you may want to consult with an experienced tax lawyer in your area.