How does the saying go? “Nothing is sure in life except death and taxes”.
Well, it’s true. But paying taxes doesn’t have to be a death sentence. If you understand what you need to pay and when, it will save you from making the same big mistake that many startups make – not putting enough aside to take care of what is owed at the end of each year and sometimes quarterly. This is a struggle for many startups to understand because before we were entrepreneurs, we were likely working in a job where our employers took taxes out of our paychecks. We are not used to having to put money aside every month for something we never really “see”.
It is vital to understand the federal and state taxes you are required to pay and when you are required to pay them. Spend a few extra minutes with your accountant and ask him to explain your tax responsibilities and payment schedule. Rules may differ from state to state so make sure you are working with someone who knows both your state and your industry.
You may be responsible for the following taxes:
Each state will have different sales tax levels. You will need to pay these when you incur an expense, but you also will be responsible for collecting these when you sell merchandise or when you offer your services (at a performance, as a composer, etc.). If you collect sales tax, you will need to remit that to the government on a periodic basis (monthly/quarterly/annually) so put aside any tax you collect from your customers.
Corporate Income Tax
You will be required to submit income tax annually. Much like you pay income tax as an individual, you must pay income tax as a business. Corporate income tax, however, often is at a lower rate than personal income tax and you can reduce business taxable income with deductible expenses. Your bookkeeper and accountant will be able to advise you on the best way to structure your income tax. But, know how much you will need to put aside every month to ensure you have enough to cover your income tax at year-end.
It is less likely that you will be responsible for this tax early on as you probably won’t have employees. One exception is if you decide, on your accountant’s advice, to compensate all band members as employees instead of as shareholders or contractors. When you do retain employees, you will have to submit their income tax, FICA (social security and Medicare) and federal unemployment tax payments on their behalf, every time you create their paycheck. The tax rates will vary depending on where the business is located, but the government is very strict on ensuring that these are paid soon after the employee is paid, as this is considered the employee’s money and not yours. If you plan on paying your band mates as employees, be sure to understand employee taxes so you are paying them promptly and correctly.
When you set up your bank accounts, ask your banker to set up a separate account for withholding taxes. This way, it is easier to manage your “spending” money, and you are less likely to touch the money you have put aside for taxes.
Knowing your tax responsibilities can save you some significant heartache down the road for two reasons:
- Taxes add up and can become the most significant debt you carry if you don’t put aside the money you owe on a regular basis. An annual tax bill can be tens of thousands of dollars – not an easy amount to recover if you haven’t put it aside.
- Once you get behind on your taxes, the tax collectors will show you no mercy. The last thing you want is to be scrambling to find a way to keep the tax guys at bay.
It’s best to sit down with your accountant and understand your tax requirements.
Decide who is going to manage your books and keep track of financial transactions.
Managing expenses requires discipline. You will need to make decisions about your business rules and processes.