Business Taxes

As a business owner you are responsible, authorized and responsible for complying with tax laws. There are many different types of taxes that are important for small businesses. Employers are responsible to have a basic understanding of all the tax issues.

ABOUT TAXES 

• Even if you hire a tax preparer, you will be responsible for penalties, interest, and tax payments if an error is made on your tax return. You may negotiate reimbursement of penalties and interest with the tax preparer, but the IRS will be paid, no matter what, and you are responsible for payment.  

• It is your responsibility to have a basic understanding of tax issues in order for you to work effectively with a tax preparer or to do you own taxes. 

• Taxes are every citizen’s responsibility.  

• To be sure all taxpayers pay their fair share of taxes the law provides penalties if you do not file returns or pay taxes as required. Criminal penalties may be imposed for willful failure to file, tax evasion, or making a false statement.  

• Taxes that your business has withheld on behalf of its employees or collected as sales tax are not dollars that you can use to cash flow your business. These dollars do not belong to you or to your business. Taxes that your business owes must be paid based on accurate information and timely tax payments.  

• Your business could be closed by a taxing agency if you fail to comply with all tax laws.  

• If you run a healthy business and pay your taxes, you will have nothing to be fear from a taxing authority. You may have read about or seen on television horror stories about business owners who were “abused” by the Internal Revenue Service. In all likelihood, a minor error on behalf of the business owner opened the floodgates of bureaucratic nightmares.  

• Keeping accurate records, filing accurate tax returns, and paying your taxes in a timely manner are the key to your “tax” peace of mind and prevention of tax hassles and trauma.  

• There are many avenues of tax sheltering that are legitimate and appropriate for use by all taxpayers. It is illegal and foolish to think that hiding income or creating false expenses is a way to reduce a tax liability. Further, if your business cannot cash flow or be profitable without “cheating” on taxes, it is not a healthy business.  

Educate yourself as much as you can about all tax issues related to your business.  Take advantage whenever you can of legitimate tax shelters, deductions and credits.  

All taxing agencies are willing to work with business people, especially when a business is being started. They can be part of your business team. 

FIVE PRINCIPAL TYPES OF BUSINESS TAXES: 

• Business Income Tax 

• Self-Employment Tax 

• Excise Tax 

• Employment taxes 

• Sales and Use Taxes 

The Internal Revenue Services publishes a general tax calendar each year. You can order this calendar from the IRS or you cam download it from the www.irs.gov web site. This publication explains when to file returns and make tax payments. 

BUSINESS INCOME TAX 

Every business must file an annual income tax return. Which form you use and how you pay the tax depends on how your business is organized.  

SELF-EMPLOYMENT TAX 

• Self-employment tax us the Social Security and Medicare tax for sole proprietors, self-employed farmers and fishermen, and members of a partnership. You figure self-employment tax on the profits from your business using Schedule SE, and report it on your Form 1040.  

• Self-employment tax is the same tax paid by you and your employer for FICA and Medicare when you are an employee. When you are an employee, you and your employer each pay half. When you are self-employed, you pay it all – you are both your own employer and your own employee.  

EXCISE TAX 

If you manufacture or sell certain products, you may have to pay excise taxes. There may also be excise tax on certain kinds of businesses, certain transactions and the use of various kinds of equipment, facilities and products.  

EMPLOYMENT TAXES 

If you have employees you are required by federal and most state laws to withhold or pay employment taxes on their behalf, including: 

• Federal Income Tax Withholding 

• Social Security (FICA) and Medicare Taxes 

• Federal Unemployment (FUTA) Tax  

• State Income Tax Withholding 

• State Unemployment Tax 

Federal Income Tax Withholding 

You, as an employer, must calculate and withhold employee federal income taxes from employee paychecks, and must report on and pay these taxes.  

Social Security and Medicare Taxes 

An employer must pay one-half of these taxes and must withhold the other half from the employee. The employer is required to pay and report on these taxes. If you are a sole proprietor with no employees, this is called Self-Employment tax.  

Federal Unemployment Tax (FUTA) 

An employer reports and pays FUTA tax separately from Social Security and medicare tax and withheld income tax. FUTA tax is paid only from the employer’s funds. Employees do not pay this tax.  

State Income Tax Withholding  

An employer must calculate and withhold the employee state income taxes from the employee paychecks, and must report on and pay these taxes to the state.  

State Unemployment Tax 

An employer reports and pays unemployment tax separately from Social Security and Medicare, and withheld income yax. Unemployment tax is paid only from the employer’s funds. Employees do not pay this tax.  

SALES AND USE TAXES 

In some states, sales tax applies to the gross receipts from selling, leasing or renting tangible items at retail or from providing taxable services in the state.  

Use tax is similar to sales tax. Use tax is based on your cost of the taxable purchase and applies when you purchase taxable items to use, store, or consume in your state without paying sales tax.  

If you do not make taxable sales but make purchases subject to use tax, you must register to remit use tax.  

Some cities have their own sales and use tax. Contact the sales or use tax division in your city. 

The sales tax division office can provide information and forms necessary for compliance. 

ESTIMATED TAXES 

Individuals 

Business owners who are proprietors, partners and S corporation shareholders pay their tax with estimated tax payments during the year. This is similar to how your taxes are paid when you are an employee. Based on your annual or hourly earnings, your employer withholds from you and pays to the taxing authority the amount of tax due. Likewise, estimated taxes are based on your annual profits and are paid by you to the taxing authority. Work with an accountant to determine the amount of your estimated tax payments.  

Corporations 

A “C” corporation must deposit the taxes it owes, including estimated tax payments and any balance due shown on its tax return. Work with an accountant to determine the amount of your estimated tax payments. 

DEPOSITING TAX PAYMENTS 

You generally must deposit taxes that you owe before you file your tax return (just like your employer deposits taxes you owe when you are an employee).  

Once you have applied for an Employer Identification Number, the IRS will send you a deposit coupon book. 

Electronic deposit is also available and in some cases, is required.  

INFORMATION TAX RETURNS 

• Information returns are required for reporting various kinds of payments made to, or certain payments received from, persons who are not your employees. These returns are used to match the payments with each person’s income tax return to see if payments were included in income. You must give a copy of each statement you are required to file to the recipient or payer.  

• IRS Form 1099 is the most commonly used form, similar to a W2 form an employer uses to report wages paid to employees. 

• If you are a private contractor, you customers should provide you with this form when they pay you more than $500 (this amount may change if the law changes) in one year. If you are an independent contractor who is paid less than $500 in one year by a customer who does not provide the form, you must still report those amounts as income! 

• Your business may be required to file other information returns such as IRS Form 8300, on which cash payments over $10,000 or foreign currency in one or more related business transactions must be reported. 

• Check with your tax accountant to determine if your business is required to file other information returns.  TAX IDENTIFICATION NUMBERS 

YOU ARE AUTHORIZED, RESPONSIBLE AND ACCOUNTABLE 

• The information provided in this section is provided to guide you on your own exploration and fact-finding process.  

• It is critical that you verify and validate the information you receive about your tax and other legal compliance issues. Always go directly to the taxing authority to find out what your responsibilities and procedures are. Whenever possible, get the information, instructions or opinions that you need in writing from the people authorized to give them. A discussion with your brother-in-law, your neighbor, a business counselor, or another business owner about whether or not you are required to collect and pay a specific type of tax will not hold up in court.  

• The Internal Revenue Service has a web site at www.irs.gov . From this site, you can download every required federal tax filing form or publication. If you have the opportunity and access, it’s an important site to explore and familiarize yourself with.  

• Your state may also have a web site – do a search! 

• Become familiar with how to access state, federal and local offices that are responsible for the rules and regulations your business must follow. You are a taxpayer. These are services that are provided because you are a taxpayer and are required to comply, or because you are a citizen and a business owner entitled to the benefits that may be offered. 

TAX IDENTIFICATION NUMBERS 

A business may be responsible for paying more than one type of federal or state tax. Each taxing authority assigns a different identification number to your business, just as each of your vendors assigns your business a different customer account.  

Apply for these required ID numbers, safeguard them and use them accurately. Some business owners delegate this task to an accountant or an attorney. You can delegate this task to whomever you wish – but remember; you are accountable, responsible and authorized, no matter what. These ID numbers belong to you. It’s important for you to mind your business!  

FOUR PRINCIPAL TYPES OF IDENTIFICATION NUMBERS 

• State Tax Identification Number 

• State Workforce Identification Number 

• State Sakes and Use Tax Permit 

• Federal Employer Identification Number (EIN) 

State Tax Identification Number  

You may need a state tax identification number if you:  

• Have employees, 

• Make retail sales, 

• Withhold state income taxes from employees,  

• Make estimated tax payments, 

• File a state income tax return for your business, 

• Pay state special taxes such as alcohol, tobacco, or gasoline taxes, 

• Are a vendor of goods or services to a state government agency, or  

• Purchase a business other than a corporation. 

Contact your state revenue department to receive copies of the application form and instructions. 

Workforce Identification Number 

Businesses that have employee may be required to register with their state workforce center to receive an identification number. It may be different than the number you receive from your state revenue department. This number identifies your business as an employer who is required to pay unemployment tax. 

Federal Employer Identification Number (EIN) 

• If you are going to have employees, or if you have any form of business other than a sole proprietorship, the business must have a federal tax identification number (EIN). 

• To apply, contact the Internal Revenue Service. Request form SS-4, Application for Employer Identification Number – you can also download this form from the IRS web site. 

• In the event you have not received your EIN when your return is due, file the return and write “applied for” and the date of your application on the form.  

• You must use your EIN on all returns or other documents you send to the IRS. You must also provide your EIN to other persons who use your EIN to report payments to you. If you do not furnish your identification number as required, you will be subject to penalties. 

• If you purchase an existing business, or your organization or the ownership of business changes, you must apply for a new EIN. 

State Sales And Use Tax ID 

Check with your state revenue department for sales and use tax identification number requirements or permits before making sales. The permit shows that you are authorized to make retail sales or provide taxable services in the state.  

*Pay close attention to all of your ID numbers. Keep them current and record them accurately. Sloppy work when reporting information using incorrect ID numbers could result in time-consuming efforts to correct problems, as well as additional taxes, interest, or penalties