Taxes, You, Your Business, and Your Workers
If you’re like most entrepreneurs, you probably had a list of reasons why you wanted to become a business owner. Filing taxes probably wasn’t high on that list. However, like the old adage goes – nothing is certain in life other than death and taxes. And this definitely applies to business owners who are frequently stressed out during the tax season trying to figure out all that’s required by state and federal law.
While it’s a very smart idea for business owners to get professional tax help, here are some basic guidelines and necessary filings for you, your business, and your employees that you’ll want to familiarize yourself with.
Federal Tax Obligations
The business entity that you have chosen for your business drives the taxes that you’re responsible for. These taxes include
· Income Tax
· Self-Employment Tax
· Taxes for Employers
If you are a sole proprietor, you will be liable for filing
1040 U.S. Individual Income Tax Return – This is the standard income tax form that both employees and self-employed individuals must file.
Schedule C or Schedule C-EZ – You will want to use Schedule C to report income or loss from a business you operated or a profession you practiced during the year as a sole proprietor. This is where you’ll provide information on your business expenses. If you have less than $5,000 in expenses, you can use the shorter Schedule C-EZ form.
Schedule SE Form 1040 Tax – This form is used to calculate the tax due on net earnings from self-employment for the purpose of paying into Social Security and Medicare. Currently, the maximum amount of self-employment income subject to Social Security tax is $113,700.
Partnerships of two or more persons must file the following:
1065 U.S. Return of Partnership Income – This is where the business reports income, deductions, gains, and losses.
941 Employer’s Quarterly Federal Tax Return – This form is used for determining how much you will need to pay for your employees’ Social Security and Medicare.
940 Employer’s Annual Federal Unemployment Tax Return – You will want to use this form for reporting your annual Federal Unemployment Tax Act tax. This tax provides funds for paying unemployment compensation to workers who have lost their jobs. Only employers, not employees, pay FUTA tax.
Individual partners within a partnership must also file taxes. These filings include
1040 U.S. Individual Income Tax Return – (see description under sole proprietorships)
Schedule SE – This is where you will report income or loss from the partnership.
Schedule SE Form 1040 Tax – (see description under sole proprietorships)
1040-ES – This filing is used to calculate estimated tax that may be owned on income that isn’t subject to withholding (earnings from self-employment, interest, dividends, rents, and alimony)
While many believe that all corporations are big enterprises, many are actually small businesses that have chosen this legal entity specifically for tax reasons. The following provides the primary forms that need to be filed by a corporation
1120 U.S. Corporation Income Tax Return – This is required to report the income, gains, losses, deductions, credits, and to determine the income tax liability of a corporation.
1120-W Estimated Tax for Corporations – Corporations that estimate their tax to be $500 or more must make estimated tax payments.
941 Employer’s Quarterly Federal Tax Return – (see description under partnership)
A type of entity that is commonly used by small businesses is the S Corporation. This enables a business to pass corporate income, losses, deductions, and credits through to shareholders for federal tax purposes. Thus along with the filings required by corporations, the shareholders of an S corporation must also report the flow through of income and losses on their personal tax returns. The purpose of this type of corporation is to avoid double taxation on corporate income.
This is another entity that is common for small businesses. There are a number of benefits for businesses that choose this entity. The benefits include being able to protect owners from business debts and liabilities as well as pass-through taxation, which means that the business doesn’t pay taxes at the business level. Income or loss is “passed through” to owners and reported on their personal income tax returns.
The tax forms that an LLC must file are
1065 U.S. Return of Partnership Income – (see description under partnership)
1120 U.S. Corporation Income Tax Return – (see description under corporations)
Reporting Payments to Independent Contractors
Have you paid independent contractors? You may need to file Form 1099-MISC, Miscellaneous Income, to report payments for services performed for your trade or business. If the following conditions are applicable, you will need to report these payments to the IRS:
You made the payment to someone who is not your employee
You made the payment for services in the course of your trade or business
You made the payment to an individual, partnership, estate, or corporation
You made payments to the payee of at least $600 during the year.
State Tax Obligations
Yes, there’s still more! Besides taxes paid to the federal government, you will also likely have to pay state and local taxes. These taxes vary by state and locality, so it’s important to have knowledge of your specific state and city’s requirements.
In most cases, you will have to pay income tax. There are also some states that require payment of state workers’ compensation insurance and unemployment insurance taxes. The SBA offers useful links to obtain more information on state tax requirements.
A Few Small Business Tax Filing Tips
· It’s a smart idea to retain documentation for common red flag deductions such as meals, entertainment, travel, and vehicle expenses. This means either having the receipts or making note of the date, place, total, and business purpose for expenses under $75.
· Home office deductions can include a portion of HOA dues, professional housekeeping, repairs, maintenance, and homeowner’s insurance along with rent or mortgage interest, utilities, capital improvements, and property tax.
· Loans from lending institutions or family members, transfers of money from your personal accounts, cash advances, or credit card advances are not considered business income and are not taxable.
· Business owners can deduct the cost of their health insurance for both themselves and their families.
· You can hire your child or a child who lives in your neighborhood for your business since wages can be deducted as a business expense. Yes, you’ll need to cut them a check every pay period and fill out a W-2 form for them. Any child can earn up to $5700 tax free each year, and it’s a great way to provide some hands-on work experience, which will help them in the future.
Tax planning and proper filing is a critical component of any business whether it’s a one-person business or a large-scale corporation. It’s well worth the time to develop a basic understanding of what is required and what you need to do to comply with the law.
If it’s more than you can take on as a business owner, there are plenty of tax professionals out there who can help you stay organized and on schedule with filings. With the right resources, taxes don’t have to be a nerve-racking part of business. They can be a simple matter-of-fact item on your “to-do” list that you can complete efficiently and correctly.