Entrepreneurship is very popular right now. The United States Bureau of Labor Statistics reported that more than 14 million Americans currently work for themselves. About 53 percent of Americans want to be their own bosses, according to the State Science & Technology Institute (SSTI). A full 13 percent of tax returns filed across the United States included some amount of self-employment tax. With so many people wanting to start a business, it’s likely that at some point in your accounting career, a client will come to you for help.
Planning for a Business
A business plan is essential for a business to succeed and grow, but many aspiring business owners don’t know where to start. They might not know what paperwork they need to fill out to be recognized as a business, or what kind of structure – incorporated, sole proprietorship, etc. – is right for their business. As their accountant, you can help clients who want to start their own business understand the business structure options available to them. You can guide them to the right resources to get started and discuss with them the appropriate time to take certain actions, like setting up business financial accounts.
Accounting for Self-Employment
Taxation is a big concern for the self-employed, but aspiring small business owners often don’t know it. They may already pay income taxes on a regular job they hold with an employer, but the taxes they will pay as an entrepreneur are very different.
For one thing, taxpayers who work for themselves have to pay a self-employment tax. This tax covers their contributions to Medicare and Social Security programs – but without an employer to match their payments, these entrepreneurs end up paying twice the tax their traditionally employed counterparts pay, Accounting Web reported. Whether your client plans to make a living through owning their own business or just supplement their income, it can be a shock to see how high the tax burden is.
Then there’s the paperwork. Instead of a simple W-2 form, self-employed taxpayers may have to file Form 1040 and one of the following forms, Accounting Web reported:
- Schedule C
- Schedule C-EZ
- Net Profit from Business
- Profit or Loss from Business
Even the timing of when self-employed taxpayers make their payments is different. Unlike employees, who have some money withheld from their paychecks throughout the year and then file one tax return during the year, self-employed workers must make quarterly payments to avoid the risk of a tax penalty.
The entrepreneurial clients you help during your accounting career may seek your advice in dealing with a wide range of situations, from planning for their businesses to correctly handling their tax burdens. Following their dreams of starting their own business can be a major life change. To handle their responsibilities and achieve success, these clients will need your expertise – which means you will need to keep up with changes in the already complex tax code.