Starting a business? Here are all
tax forms you'll need to get started
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
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
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
Sole proprietorships that don't meet these conditions,
as well as corporations and partnerships, need to obtain an employer
identification number (EIN).
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 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.
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.
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.
income tax withholding
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.
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.
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.
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.
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.
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
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