Business taxes and your company:
What you'll have to pay and why
July 29, 1999 -- Are you a potential business
owner trying to figure out what kinds of taxes you will have to
keep up with if you go into business?
The answer to your question partially
depends on how you structure your company. This tax tip explains
the four general types of business taxes: income taxes, self-employment
taxes, employment taxes and excise taxes.
Income taxes are "pay as you go." This means that
waiting until tax returns are due to pay can cause problems. The
IRS expects business owners to pay these taxes as they earn income
through the year. The problem for many owners is that they often
don't have this income withheld from their wages the way employees
usually do. If this is the case, or if the amount withheld is insufficient,
the business owner has to make estimated tax payments.
What determines whether estimated taxes are
due? This depends on the business structure. Sole proprietorships,
partnerships, and S corporation shareholders should make estimated
tax payments if they expect to owe at least $1,000 when they file
their annual returns. They should use Form 1040-ES, Estimated
Tax for Individuals, when they calculate and pay these taxes.
Corporations should use Form 1120-W, Estimated
Tax for Corporations, to make estimated tax payments if
they expect to owe at least $500 when they file their tax returns.
People who work for themselves might avoid some workday hassles,
but taxes aren't on the list. They have to pay self-employment taxes
for their Social Security and Medicare coverage if they net at least
$400 from their self-employment, or if they receive at least $108.28
working for a church. They should use Schedule
SE, Form 1040, when they calculate these taxes. They can
deduct one-half of this tax as an income adjustment on Form 1040.
Many business owners try to use independent contractors so that
they can avoid the expense and paperwork associated with having
employees. It is important to know the
rules for making this designation. If a business owner incorrectly
classifies an employee as an independent contractor, he may be held
accountable for employment taxes for that worker, plus a penalty.
If a business owner does have employees, he
needs to know what the IRS requires in terms of paying employment
taxes and filing forms. The three groups of employment taxes are
Federal income tax withholding, Social Security and Medicare taxes,
and Federal unemployment (FUTA) tax.
Business owners are required to withhold federal
income taxes from each employee's wages. Don't be intimidated by
the process of figuring how much federal income tax to withhold
from each paycheck. Use the filing status and withholding allowances
shown on Form W-4, Employee's
Withholding Allowance Certificate, to figure out how much
income tax to withhold from an employee's wages. For additional
assistance, refer to Publication
15. It details exact withholding amounts.
Keep in mind that the amount of income tax withholding should
depend on marital status, withholding allowances and income bracket.
Employees can't base their withholding amounts on a fixed dollar
amount or percentage; however, the employee can choose to specify
a dollar amount to be withheld in addition to the amount that the
employer is supposed to withhold.
There are instances where a business owner should
send the IRS copies of certain Forms W-4 received. Specifically,
a business owner should contact the IRS if an employee claims more
than 10 withholding allowances or exemption from withholding when
his wages would normally exceed $200 per week. Don't send other
forms W-4 unless the IRS requests them.
Also, the IRS permits employees to claim fewer
withholding allowances than they are entitled to claim. Workers
will often do this to make sure a sufficient tax is withheld or
so that they can offset other sources of taxable income that aren't
subject to adequate withholding.
Social Security and Medicare taxes pay for benefits
that workers and their families receive under the Federal Insurance
Contributions Act (FICA). Social Security tax pays for benefits
under the old age, survivors and disability insurance part of FICA.
Medicare tax pays for benefits under the hospital insurance part.
A business owner's responsibility here is twofold: He must withhold
part of these taxes from his employee's wages, and the IRS expects
him to pay a matching amount.
The employee tax rate for Social Security is
6.2 percent -- this is the amount the business owner must withhold.
The employer tax rate for Social Security is also 6.2 percent. For
1999, once an employee's annual wages exceed a wage base limit of
$72,600, the IRS no longer charges Social Security taxes on his
income, meaning the employer no longer has to withhold or pay these
The employee tax rate for Medicare is 1.45 percent
-- this is the amount the business owner must withhold. The employer
tax rate for Medicare tax is also 1.45 percent. There is no wage
base limit for Medicare tax.
The federal unemployment tax compensates workers
who lose their jobs. Business owners must report and pay FUTA tax
separately from Social Security and Medicare taxes and withheld
income tax. Business owners are to pay this tax only from their
own funds instead of withholding it from their employees' pay.
for employment taxes
Most business owners report federal unemployment tax on Form
Annual Federal Unemployment (FUTA) Tax Return. Those
who qualify can use the Form
There are three requirements for using Form
940-EZ. A business owner must be paying unemployment taxes to only
one state and making that payment by the due date for filing Form
940 or 940-EZ. In addition, all wages that are taxable for FUTA
tax purposes must also be taxable for the state's unemployment tax.
See Publication 15 for more information regarding this form.
When hiring employees, following certain procedures
will simplify a business's tax records tremendously. First, have
each new employee fill out Form I-9 and Form W-4.
An employee with a qualifying child may be entitled
to receive advance earned income credit (EIC) payments with his
or her pay during the year. To get these payments, the employee
must provide a completed Form W-5, Earned
Income Credit Advance Payment Certificate. Business owners
are required to make advance EIC payments to employees who have
provided this form. For more information, see Publication 15.
Business owners must verify that new employees
are eligible to work in the United States. Both the business owner
and the employee must complete the Immigration and Naturalization
Service (INS) Form I-9, Employment
Eligibility Verification. This form is available
for download, at INS offices or by calling the INS at 1-800-755-0777.
Once the calendar year ends, business owners
must provide copies of Form W-2, Wage
and Tax Statement, to each employee who received wages during
the year. Business owners should also send copies to the Social
Security Administration. Generally, these should be in the hands
of the employees no later than Jan. 31 of the following year.
There are some special excise taxes business owners should be
aware of if their business involves:
- Selling or using vehicles
- Producing, selling or importing guns, tobacco
There are five forms that are of particular
- Form 720 is the Quarterly
Federal Excise Tax Return -- Used to report environmental
and communications taxes, as well as taxes on heavy trucks, trailers
and passenger cars.
- Form 2290, Heavy
Vehicle Use Tax Return -- Used to report taxes on trucks,
truck tractors and buses used on public highways.
- Form 730, Tax
on Wagering, -- Used by businesses that accept bets, or
run pools or lotteries, to figure taxes due on betting.
- Form 11-C, Occupational
Tax and Registration Return for Wagering --Used
by businesses that accept bets, or run pools or lotteries, to
register wagering activity.
- Federal Bureau of Alcohol, Tobacco and
Firearms forms -- Used by businesses that produce, sell, or
import guns, tobacco or alcohol, as well as businesses that manufacture
equipment used in the production of these items. Business owners
should use Form
5630.5 (Alcohol, Tobacco) or Form 5630.7 (Firearms -- not
yet available online), Special Tax Registration and Return,
to register their place of business and pay an annual tax. Also,
use ATF Form 5300.26, Federal
Firearms and Ammunition Excise Tax Return, to determine
any firearms excise tax liability.
510 for additional information on excise taxes.
-- Posted July 29, 1999