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Starting a business? Here are all the
tax forms you'll need to get started

Tax forms for small businessesTaking the plunge and starting a business? Before diving in as an official member of the small business version of the Polar Bear Club, you need to understand which tax forms you'll need.

If the idea of tax forms make you want to hibernate, though, here's a cold splash of water on your face: According to the Small Business Administration, tax problems are cited as a major reason for business failures.

So listen up. This tax tip summarizes the forms you'll need to have on hand before you can make your new business grow. It also explains why you need each form and where you can get it.

The right number
To start with, the IRS will need an identification number to process your business's return. If you have a sole proprietorship, you can use your Social Security number, provided you don't have employees or file returns for employment, excise, alcohol, tobacco or firearms taxes.

Sole proprietorships that don't meet these conditions, as well as corporations and partnerships, need to obtain an employer identification number (EIN).

The Social Security Administration issues Social Security numbers, which follow the format 000-00-0000. An EIN is issued by the Internal Revenue Service and follows the format 00-0000000.

Businesses can get an employer identification number by mail, but should allow at least four to five weeks. They need to file Form SS-4: Application for Employer Identification Number. These forms are available at Social Security Administration offices or can be downloaded from the IRS, and they are returned by mail. An EIN also can be immediately obtained by calling the IRS at 1-800-829-3676.

Income taxes
Income taxes are "pay as you go." Many business owners don't have income withheld the way employees usually do, meaning they have to make estimated tax payments. Depending on your business structure, you will need to file one of the following:

Who needs this? Sole proprietorships, partnerships, and S corporation shareholders that expect to owe at least $1,000 when they file their annual returns.

Who needs this? Corporations that expect to owe at least $500 when they file their tax returns.

Self-employment taxes
Working for yourself might release you from the daily grind, but you still have to pay self-employment taxes for your Social Security and Medicare coverage:

Who needs this? Self-employed workers who net at least $400 from their self-employment or receive at least $108.28 working for a church.

A brighter side: You can deduct one-half of this tax as an income adjustment on Form 1040.

Employment taxes
If you're thinking about using independent contractors to avoid the expense and paperwork associated with having employees, make sure that you check the rules for making this designation. Incorrectly classifying an employee as an independent contractor can mean having to pay employment taxes for that worker, plus a penalty.

For those business owners who do have employees, there are three groups of employment taxes to keep up with: Federal income tax withholding, Social Security and Medicare taxes, and Federal unemployment (FUTA) tax.

Federal income tax withholding

  • Form W-4, the Employee's Withholding Allowance Certificate

Who needs it? Business owners with employees use this form to determine how much in federal income taxes should be withheld from each employee's wages. It records the worker's filing status and withholding allowance.

For additional assistance: refer to Publication 15. It details exact withholding amounts.

Social Security, Medicare and Federal Unemployment (FUTA) Tax
The Social Security tax pays for benefits under the old age, survivors and disability insurance part of FICA. The Medicare tax pays for benefits under the hospital insurance part.

A business owner's responsibility here is twofold: The owner must withhold part of these taxes from an employee's wages, and the IRS expects the owner to pay a matching amount. The employee and employer tax rate for Social Security is 6.2 percent. The employee and employer tax rate for Medicare is 1.45 percent.

The federal unemployment tax compensates workers who lose their jobs. Business owners must report and pay FUTA 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.

Who needs it? Business owners who meet three requirements: They pay unemployment taxes to only one state, they make those payments by the due date for filing this form and all wages they pay that are taxable for FUTA tax purposes must also be taxable for the state's unemployment tax.

  • Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return

Who needs it? Business owners who can't use Form 940-EZ.

Special note: 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 that income. There is no wage limit on the Medicare tax.

Forms for employment taxes
When hiring employees, establishing a set procedure for paperwork will simplify your tax records tremendously. Have each new employee fill out the forms listed below.

  • Form W-5, Earned Income Credit Advance Payment Certificate

Who needs this? An employee with a qualifying child who is entitled to receive advance earned income credit (EIC) payments with his or her pay during the year.  

  • Form I-9, Employment Eligibility Verification

Who needs this? All business owners must verify that new employees are eligible to work in the United States. Both the business owner and the employee must complete this form, which is available for download, can be picked up at Immigration and Naturalization Service offices or obtained by calling the INS at 1-800-755-0777.

Who needs this? Once the calendar year ends, business owners must provide copies of this to each employee who received wages during the year.

Additional notes: 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.

If you have any questions regarding these forms, and whether they apply to your business, don't hesitate to consult a professional.

You should also consult two IRS publications, Publication 454, "Your Business Tax Kit" and Publication 583, "Starting a Business and Keeping Records."

-- Posted: Nov. 11, 1999

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