Basics of Business Tax

So let's get serious for a minute.. It’s one of Benjamin Franklin’s most famous quotations: “In this world nothing can be said to be certain, except death and taxes” While business taxes are a certainty, the actual tax rates you pay are anything but certain, so let's keep informed and up to date with this important part of our businesses.

☞ What’s an EIN Number and Do I Need One?

Typically, most businesses need an Employer Identification Number (EIN), also known as a Federal Tax Identification Number. This nine-digit number, expressed as XX-XXXXXXX, is used to identify your business on all business tax reporting returns and forms. You will need an EIN if you answer YES to any of the following questions: Do you have employees? Is your business a corporation or a partnership? Do you file employment, excise, or Alcohol, Tobacco and Firearms returns? Do you withhold wages on income, other than wages paid to a non-resident alien? You can apply for a new EIN online.

☞ 3 Steps to Filing Employment Taxes

Running a business with employees definitely adds several line items to your tax responsibilities. Specifically, you’re required to report and deposit employment taxes, which include federal income taxes, Social Security and Medicare taxes, and Federal Unemployment (FUTA) taxes... [as if dealing with employees isn't enough lol]

  • Depositing Employment Taxes

According to the IRS website, you must deposit any federal income tax withheld, plus both the employer and employee Social Security and Medicare taxes. FUTA tax deposits are required for any quarter in which the tax is more than $500 and must be made by the end of the month following the end of the quarter. The FUTA tax is paid entirely by you, the employer, and is not withheld from your employees’ wages. All federal tax deposits must be made electronically through the Electronic Federal Tax Payment System (EFTPS).

  • Reporting Employment Taxes

Generally, you must report wages, tips and other compensation paid to your employees by filing Form W2 with the IRS at the end of the year. This is in addition to reporting the taxes you deposit. The reporting of income, Social Security and Medicare taxes is done each quarter using Forms 940, 941 (for most businesses) and 944 on paper or via e-file.

  • Maintaining Tax Records

You should keep all records associated with your employment taxes, including amounts and dates of all wage and pension payments made to all employees, for at least four years.

☞ How to File Self-Employment Taxes

Hey freelancers this is a good one!! The IRS considers you self-employed if any of the following applies to you: You are in a trade or business as a sole proprietor or independent contractor. You are a member of a partnership or limited liability company (LLC) that carries on a trade or business (limited partners are usually exempt; LLC members may be treated as employees if the business makes an election). You are otherwise in a business for yourself, including a part-time businessIf you are self-employed earning $400 or more per year, you will need to pay self-employment taxes, which consists of Social Security and Medicare taxes, in addition to income taxes. Since you don’t have an employer withholding these taxes from your wages, you must estimate them and pay them quarterly.

Use Form 1040-ES for this. To report your Social Security and Medicare taxes, file Schedule SE on Form 1040.

  • Husband and wife ventures

There may be some tax advantages for a business run exclusively by a husband and wife. The Small Business and Work Opportunity Act of 2007 allows a husband and wife business to avoid being treated as a partnership for federal tax purposes. Instead, each spouse is treated as a sole proprietor and all income, gains, losses, credits and deductions are divided between the spouses based on their respective interests in the venture. This may give each spouse credit for individual Social Security earnings. Like everything involving tax laws, it gets complicated, so consult with your tax advisor to see if you qualify.

☞ Understanding State Business Taxes

Your business tax obligations don’t stop at the federal level. State and local government agencies want slices of your revenue, too...

  • State Income Taxes

Nearly every U.S. state has a business or corporate income tax on their books and your tax requirement depends on the legal structure of your business. For example, a Limited Liability Company (LLC) is taxed separately from the business owners, while sole proprietors use the same tax form to report personal and business income taxes.

  • State Employment Taxes

In addition to federal employment taxes, you must pay certain state employment related taxes as well. All states require payment of state workers’ compensation insurance and unemployment insurance taxes. The following states or territories also require businesses to pay for temporary disability insurance: California, Hawaii, New Jersey, New York, Rhode Island, and Puerto Riiiico!

☞ About Collecting Sales Taxes

As a consumer, we’re familiar with paying sales tax whenever you purchase goods from a retailer. The sales tax is collected from the buyer by the seller, who then forwards it on to the state. As a businessperson, you are the seller, so it’s your responsibility to collect, report and pay sales tax on most everything sold to a customer in a state where your business has a physical presence.