Read Start Your Own Business Online
Authors: Inc The Staff of Entrepreneur Media
Start Your Own Business (111 page)
Whatever you decide in the early phase of your business, plan to reassess your compensation every six months. As your business evolves, its cash-flow model and capital needs may change dramatically—as may your own. A regular assessment enables you to adjust accordingly.
chapter 41
TAX TALK
What You Need to Know
About Your Taxes
About Your Taxes
By Joan Szabo
a freelance writer who has covered tax issues
for more than 25 years
a freelance writer who has covered tax issues
for more than 25 years
W
hen it comes to taxes, there’s no way to get around the fact that you have to pay them regularly. Federal, state and local taxes combined can take a big chunk out of your company’s money, leaving you with less cash to operate your business.
hen it comes to taxes, there’s no way to get around the fact that you have to pay them regularly. Federal, state and local taxes combined can take a big chunk out of your company’s money, leaving you with less cash to operate your business.
That’s why it’s important to stay abreast of your business’s tax situation and work with a qualified accountant to understand all that’s required of you by federal and state governments. The task is by no means simple. New business owners face a host of tax requirements and ever-changing rules.
If you miss deadlines or fail to comply with specific rules, you may be hit with large penalties, and, in the worst-case scenario, be forced to close up shop. You’ll also want to pay close attention to tax planning, which will help you find legitimate ways to trim your overall tax liability. Your goal is to take the deductions to which you’re entitled and to defer taxes as long as you possibly can.
e-FYIGet the scoop on wage reporting for yourself and your employees at the Social Security website at
ssa.gov
.
While a knowledgeable accountant specializing in small-business tax issues will keep you out of potential tax quagmires, you’ll be on more solid footing if you spend time acquiring your own working knowledge and understanding of the tax laws.
First Things FirstOne of the first steps you will take as a business owner is to obtain a taxpayer identification number so the IRS can process your returns. There are two types of identification numbers: a Social Security number and an Employer Identification Number (EIN).
The EIN is a nine-digit number the IRS issues. It is used to identify the tax accounts of corporations, partnerships and other entities. You need an EIN if you have employees, operate your business as a corporation or partnership or have a Keogh plan. Be sure to include your EIN on all returns or other documents you send to the IRS.
You can apply for an EIN by phone, fax, mail or online (as long as your business is an entity that is allowed to apply online). You can receive your EIN immediately by phone or by going online. To apply online, go to
irs.gov
, click on “Businesses” then “Employer ID Numbers.” A completed fax request takes about four to five business days. If you apply by mail, be sure to send in Form SS-4 (
Application for Employer Identification Number
) at least four or five weeks before you need the EIN to file a return or make a deposit. To apply by phone, call toll-free at (800) 829-4933 from 7 A.M. until 10 P.M. Monday through Friday. Before you call, the IRS suggests you complete Form SS-4 so you have all relevant information available. The person making the call to the IRS must be authorized to sign the form.
Ins and Outs of Payroll Taxesirs.gov
, click on “Businesses” then “Employer ID Numbers.” A completed fax request takes about four to five business days. If you apply by mail, be sure to send in Form SS-4 (
Application for Employer Identification Number
) at least four or five weeks before you need the EIN to file a return or make a deposit. To apply by phone, call toll-free at (800) 829-4933 from 7 A.M. until 10 P.M. Monday through Friday. Before you call, the IRS suggests you complete Form SS-4 so you have all relevant information available. The person making the call to the IRS must be authorized to sign the form.
If you do any hiring, your employees must complete Form I-9 (
Employment Eligibility Verification
) and Form W-4 (
Employee’s Withholding Allowance Certificate
). Form I-9 provides verification that each new employee is legally eligible to work in the United States. This form can be obtained from the U.S. Citizenship and Immigration Service (USCIS) by calling (800) 870-3676 or visiting
uscis.gov
; keep this form in your files in the event an IRS or USCIS inspector wants to see it. Your employees should also complete a state withholding certificate (similar to the W-4) if your state imposes personal income taxes.
Employment Eligibility Verification
) and Form W-4 (
Employee’s Withholding Allowance Certificate
). Form I-9 provides verification that each new employee is legally eligible to work in the United States. This form can be obtained from the U.S. Citizenship and Immigration Service (USCIS) by calling (800) 870-3676 or visiting
uscis.gov
; keep this form in your files in the event an IRS or USCIS inspector wants to see it. Your employees should also complete a state withholding certificate (similar to the W-4) if your state imposes personal income taxes.
Form W-4 indicates the employee’s filing status and withholding allowances. These allowances are used to determine how much federal income tax to withhold from an employee’s wages. To determine how much to withhold from each wage payment, use the employee’s W-4 and the methods described in IRS Publications 15,
Employer’s Tax Guide
, and 15-A,
Employer’s Supplemental Tax Guide
. These publications are available online at
irs.gov
.
Employer’s Tax Guide
, and 15-A,
Employer’s Supplemental Tax Guide
. These publications are available online at
irs.gov
.
You must also withhold Social Security and Medicare taxes—these are known as FICA (Federal Insurance Contributions Act) taxes. The FICA tax actually consists of two taxes: a 6.2 percent Social Security tax and a 1.45 percent Medicare tax. To calculate the tax you need to withhold for each employee, multiply an employee’s gross wages for a pay period by the tax rates. In addition, as an employer, you are required to pay a matching amount of FICA taxes on each of your employees.
TIPConsider using a payroll tax service to take care of all payroll tax requirements. The fees charged by such services are relatively reasonable. In addition, these firms specialize in this area and know the ins and outs of all the rules and regulations. With a service, you don’t have to worry about making mistakes or being tardy with payments.
Here’s how it works: If an employee has gross wages of $1,000 every two weeks, you must withhold $62 ($1,000 x 0.062) in Social Security taxes and $14.50 ($1,000 x .0145) in Medicare taxes, or $76.50. As an employer, you owe a matching amount as well, so the total amount in FICA taxes to be paid is $153. In the 2009 tax year, the maximum amount of wages subject to Social Security tax is $106,800. There is no limit on the amount of wages subject to the Medicare tax.
The IRS requires any business paying more than $200,000 annually in payroll taxes or other federal taxes to pay them through the Electronic Federal Tax Payment System (EFTPS). If you pay less than that amount, you can still deliver a check for payroll taxes owed with your deposit coupons to an authorized financial institution able to accept federal tax deposits (for more on making these deposits, see IRS Publication 15, also known as
Circular E
). The form to use to make these deposits is 8109-B (
Federal Tax Deposit Coupon
). You also can mail payments to Financial Agent, Federal Tax Deposit Processing, P.O. Box 970030, St. Louis, MO 63197. Please note that you can’t print the form from the IRS website. Call (800) 829-4933 to obtain it by mail.
Circular E
). The form to use to make these deposits is 8109-B (
Federal Tax Deposit Coupon
). You also can mail payments to Financial Agent, Federal Tax Deposit Processing, P.O. Box 970030, St. Louis, MO 63197. Please note that you can’t print the form from the IRS website. Call (800) 829-4933 to obtain it by mail.
TIPIf you’re not already using the Electronic Federal Tax Payment System (EFTPS) to pay your taxes, consider taking advantage of this convenient method. EFTPS allows you to go online or use the phone to make payments. Funds are moved from your account to the Treasury Department’s on the date you indicate. Every EFTPS transaction generates an immediate confirmation number for your receipt. To enroll, go to
eftps.gov
.
On each coupon show the deposit amount, the type of tax, the period for which you are making a deposit and your phone number. You typically pay these taxes monthly, depending on the size of your business. Approximately five to six weeks after you receive your EIN, the IRS will send you the coupon book. (For more on EFTPS, go to eftps.gov.)
In addition to making your monthly payroll deposits, you are required to file quarterly Form 941 (
Employer’s Quarterly Federal Tax Return
). This is a form that provides the government with information on the federal income taxes you withheld from your employees’ pay as well as the FICA taxes you withheld and paid. It also tells the government when the taxes were withheld so the IRS can determine if the federal tax deposit was made on time.
Employer’s Quarterly Federal Tax Return
). This is a form that provides the government with information on the federal income taxes you withheld from your employees’ pay as well as the FICA taxes you withheld and paid. It also tells the government when the taxes were withheld so the IRS can determine if the federal tax deposit was made on time.
Another tax you have to pay is FUTA (Federal Unemployment Tax Act) taxes, which are used to compensate workers who lose their jobs. You report and pay FUTA tax separately from FICA and withheld income taxes.
You pay FUTA tax on your payroll if during the current or prior calendar year you meet one of two tests: You paid total wages of $1,500 to your employees in any calendar quarter, or you have at least one employee working on any given day in each of 20 different calendar weeks.
The FUTA tax is figured on the first $7,000 in wages paid to each employee annually. The gross FUTA tax rate is 6.2 percent. However, you are given a credit of up to 5.4 percent for the state unemployment tax you pay, effectively reducing the tax rate. As an employer, you pay FUTA tax only from your own funds. Employees do not have this tax withheld from their pay. You generally deposit FUTA taxes quarterly. In addition, you must file an annual return for your FUTA taxes using Form 940 (
Employer’s Annual Federal Unemployment Tax Return
), which must be filed by January 31 of the following year. Most small employers are eligible to use Form 940-EZ.
Employer’s Annual Federal Unemployment Tax Return
), which must be filed by January 31 of the following year. Most small employers are eligible to use Form 940-EZ.
Federal payroll taxes are not your only concern. States and localities have their own taxes, which will most likely affect you. Forty-two states have a personal income tax (eight do not), which means you are also required to withhold this tax from your employees’ wages. The same is true if you do business in a city or locality with an income tax.
When applying for an EIN from your state, which you will need to do business there, ask about the procedures and forms for withholding and depositing state income taxes. The place to start is with your state department of revenue.
WARNINGIf you withhold taxes but don’t deposit or pay them to the IRS, you face a penalty on the unpaid tax, plus interest. If you deposit the taxes late, you will also be hit with a penalty.
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