The Most Important Part of Starting a Business: Understanding Taxes

When it comes to starting a business, understanding taxes is absolutely essential. While accounting and tax compliance may not be the most exciting part of running a business, they are crucial to your success. Ignoring them can lead to severe consequences—up to and including the shutdown of your business.

Why Accounting and Tax Compliance Matter

The government is often the biggest challenge for business owners who don’t manage their taxes well. An audit from the IRS can completely derail a business if the books aren’t in order. Basic accounting is essential to keep track of expenses and income, especially when you’re starting out.

When new clients come to my office and tell me they’ve set aside funds for business formation, I often advise them to allocate a significant portion of that to accounting and tax services. In the beginning, hiring a qualified tax professional can save you from serious financial headaches down the road.

Three Key Things to Understand About Business Taxes

To get a handle on taxes, let’s break down three fundamental concepts:

1. FICA Tax

   FICA (Federal Insurance Contributions Act) tax is one of the most common issues that catch business owners off guard. FICA covers Social Security and Medicare, and the government views this money as the employee’s property. When you’re an employer, you’re responsible for withholding your employees’ FICA contributions and matching it with an equal amount from your business.Even if you don’t have employees, you’re still responsible for paying FICA tax on your own income. For example, if you’re self-employed and earn $100,000, you’ll need to pay 15.3% in FICA taxes on top of your income tax. Many new business owners are surprised by this, which can lead to significant tax liabilities if they haven’t budgeted for it.
   

2. Income Tax In addition to FICA, business owners also pay income tax, which varies depending on your tax bracket. Many business owners misunderstand how income tax applies, thinking they’re in a lower bracket. But when combined with FICA, property taxes, sales taxes, and other expenses, you may be losing around 30–40% of your earnings to taxes.
   

3. The Total Tax Burden For higher-income earners, taxes can quickly add up. I often meet clients who earn $800,000 per year but are dangerously close to bankruptcy because they haven’t accounted for their tax obligations. Property taxes, income taxes, and other business expenses mean that in reality, they’re taking home far less than they think.

Why Tax Planning is Critical

The truth is, without proper tax planning, even the most successful business owners can find themselves in financial trouble. A good tax professional can provide essential guidance on how to structure your business, manage your expenses, and minimize your tax burden.

When choosing an attorney or advisor for your business, it’s wise to ask if they offer tax planning services. Many attorneys specialize in business formation but don’t provide tax advice, which is a crucial part of setting up a sustainable business.

In Summary: Master Your Taxes to Master Your Business

Starting a business is exciting, but managing your taxes is critical to your success. From basic accounting to FICA and income tax obligations, staying on top of your finances will help you avoid costly surprises. If you’re just starting out and can’t afford a full-time accountant, learn basic accounting skills, and consider working with a tax professional as soon as you can.

The most important takeaway? Understanding taxes is key to building a profitable business. By prioritizing tax planning from day one, you’ll set your business on the path to long-term success.