When you're just starting out as a small business owner in San Diego, there are many things you need to consider, including taxes. Navigating the complex world of taxes can be daunting, especially since tax laws are subject to change and always evolving. Understanding what obligations you need to fulfill can make the process much easier. In this blog, we'll explore everything you need to know about your tax requirements as a small business owner, so keep on reading!
Impacts of Entity Formation on Taxation
Whether you've set up a C Corporation, Sole Proprietorship, Partnership, Limited Liability Company, or S Corporation, tax considerations could vary for federal tax regulations.
For example - forming your small business into a C Corporation could be an excellent option to separate business and personal financials. A C Corporation is a legal structure where the owners (or shareholders) are taxed individually from the business.
If you own a business and it's organized as a Sole Proprietorship, Limited Partnership, Limited Liability Company, or S Corporation, the money you make from the business will be added to your personal taxes. Subsequently, the small business does not pay a separate tax.
Alternative Minimum Tax
The Alternative Minimum Tax (AMT) is a federal tax ensuring that certain small businesses pay a minimum income tax. Small business owners with S corporations, LLCs, and LPs in San Diego that don't have to pay the California franchise tax will still need to pay the AMT at a rate of 6.65 percent. For small businesses with this scenario, it's not a bad idea to earmark seven to eight percent for quarterly tax estimate payments. Alternatively, traditional corporations (C Corporations) that don't make a positive net profit pay the California franchise tax instead of the AMT.
California State Taxes
You must be familiar with taxation laws if you are new to your business or transferring it from out of state. It's especially true if you have an online business. In this case, you need to research how California sales tax impacts eCommerce to avoid any potential legal pitfalls. Overall, some tax regulations worth noting are listed below.
State Tax on Corporation Business Income
As you may already know, this tax is imposed on corporations based on their net income or net operating income. You don't want to be caught off guard when the tax season comes around, which could result in hefty fines and legal troubles.
To avoid such complications, start preparing early and ensure your books are in perfect order. Keep track of your income and expenses throughout the year, and use tax incentives that could lower your tax bill. Also, consult a trusted tax professional to ensure you comply with all the relevant tax laws and regulations.
Additional Special Taxes and Fees
Many taxes and fees could affect small business corporations. Depending on whether your business is handling highway construction, recycling programs, or something else, you need to be aware of what taxes can affect you. It should be wise to research all the changes to tax rules specific to California to be sure you're not missing anything.
While not technically a tax, another important piece of your small business setup is Workers' Compensation. Workers' compensation is a no-fault social insurance program offering on-the-job medical treatment for employees injured, including those in San Diego, California. It includes basic benefits of medical care, disability benefits, supplemental benefits, and death benefits. Additionally, it prevents those same employees from being able to sue the companies over their injuries.
While workers' compensation coverage and medical benefits vary by state, in California, small businesses are required to have it. And for roofing companies in California, even if they have no employees, they're still required to carry workers' compensation insurance for themselves in the event of an onsite accident.
Know Your Local and State Tax Requirements
Knowing your local and state tax requirements can save you from potential tax liabilities. Every jurisdiction has its unique set of regulations. So, what are the main things you need to consider?
City, State, and County Licenses
All corporations and small businesses operating in the City of San Diego must obtain a Business Tax Certificate at the start of their operations. This Tax Certificate is the equivalent of a "business license" in other counties or states.
Businesses self-certify that their trade is allowed in the zone where the business activity is conducted. They apply for the certificate in person or online and submit the fees that cover the Business Tax and SB-1186 mandated fee.
Additional state requirements can vary broadly depending on location and industry. You can search for more information on the CalGold website, which can help you find appropriate permit information for your business. This tool is a great option for small business owners unsure of which state requirements they'll need to obtain to operate their trade in California.
To sum it all up, small businesses and corporations need to do the following things:
- Determine a business name and file it with the San Diego County clerk using the Fictitious Business Name Statement or a Doing Business As form.
- Research the specific business structures and determine which to pursue.
- If you form an LLC, you will require an operating agreement when filing.
- Regardless of business structure, creating a good business plan can help guide you through starting and managing all elements of your operations.
- Use the City of San Diego's Economic Development page for tools, resources, and links for creating, expanding, and financing a small business.
- Browse the City's Central Library's website for small business market research, trademark information, and how–to books on a wide range of businesses and industries.
- Do additional business research with the San Diego District Office for Small Business Administration.
How to Master E-Commerce Accounting?
If your small business is entirely online, you'll need to take a unique approach to the specific challenges you'll face. So, what do you need to do?
Accurate Bookkeeping is a Must
A key element of your e-commerce accounting strategy will always be maintaining accurate records for sales, inventory, and expenses. You also need to maintain tax compliance at all times, which can vary wildly depending on your location and your customers. And if you manage your inventory properly, you'll be able to optimize your cash flow, reduce holding costs, and minimize overstock situations.
Use the Right Tech Stack
Software tools that integrate with your e-commerce platform, which automate tasks like invoicing, payroll, and expense tracking, go a long way in helping you achieve your goals. By using such tools, you'll be able to analyze your product costs and shipping expenses. Moreover, you can create a more comprehensive budget that accounts for all your expenses.
Choose a Tax and Accounting Service Provider
Hiring an e-commerce tax professional is one of the best things you can do for your business. They can help you with many challenges you face when starting a new company, such as:
- Forming your legal business entity
- Setting up your bookkeeping systems
- Determining and fulfilling your tax obligations.
By adding an expert to your team early, you avoid making expensive mistakes and going back to fix them later. In addition, you can outsource burdensome bookkeeping and accounting responsibilities to them. That minimizes your financial statement maintenance and should increase your confidence in their accuracy.
To find the ideal tax and accounting partner, start with firms experienced in serving companies like yours. Industries often have unique challenges, and a provider familiar with the ones you face can provide personalized advice and support.
It's also a good idea to focus your search locally. Not only does that make it easier to build a relationship with your provider, but they're also more likely to understand the nuances of your state and locality.
To narrow your options further, look for a track record of high-quality service and support. Online reviews are a great resource. You can also get opinions or referrals from your network.
Take Advantage of Free Consultations
Many service providers offer free consultations to help determine whether you're a good fit for each other, including us. We're a full-service accounting and consulting firm specializing in helping e-commerce businesses, Amazon sellers, digital agencies, and startups. So if you're looking for tax help in San Diego, we'd love to connect and discuss how we can make your life easier while you grow your business. Feel free to schedule a free consultation with us today!
About the Author
David Heistein, CPA
Dave is co-founder and managing partner at Profitwise Accounting. Dave is a Certified Public Accountant in the state of California, as well as an advanced QuickBooks Pro Advisor and Instructor. As a small business owner, he is dedicated to educating and informing other business owners on bookkeeping and accounting matters.