Understanding business tax implications can be one of the most difficult and daunting parts of starting a company. Not all tax laws will affect your business, with some only coming into effect later on and some possibly not being an issue for a long time, if at all. Every organization is different and, as such, has varying obligations to take into account when it comes to tax.
Everything about your business, from the employees you hire to the type of company you run, can bring with it various tax obligations. Even your business structure can change things, so it is worth bearing this in mind during the early stages of forming your organization.
As the Small Business Association points out, you also can't just assume that your tax obligations will start the moment you begin turning a profit. In fact, making any assumptions about tax could leave you out of pocket and in a fair bit of trouble.
While hiring an accountant or a professional to deal with anything related to tax can be a good idea, you should also make sure you have an understanding of how the tax system affects your business. Not only is this vital so you can check everything is being paid correctly, it is also ultimately your responsibility as the business owner. To ensure you know what your tax obligations are, here's a quick run-down of some of the basic issues you may face:
Federal tax ID
To start with, you need to check if you need an Employer Identification Number (EIN). This is also known as a Federal Employer Identification Number (FEIN) and a Federal Tax Identification Number. Similar to a social security number, an EIN is a nine-digit number provided to a business by the IRS, with each number being unique. It is used for business identification when it comes to tax.
Companies with employees are required to get an EIN, as are corporations or partnerships. Usually, if you are working as a self-employed sole proprietor, you don't need an EIN, as you can use your social security number in its place.
If you have employees, you need to accurately work out their tax rate or each paycheck. This money needs to be withheld from the employee, with their payslip detailing exactly how much money is being paid to local, state and federal taxes. These taxes then need to be paid on time, as failure to do so, as well as failure to work them out correctly, can lead to heavy fines for your business.
As Investopedia points out, these taxes cover a number of things, including the Federal Insurance Contributions Act (FICA) and income tax, if the employee earns enough for this to be applicable. Certain states also have other taxes payable by employees, so you should check where you stand when it comes to these.
If your company is incorporated but doesn't have any employees, your paychecks will still be eligible to pay the same types of payroll taxes. This is because you'll be classed as an employee of your corporation.
In the instance that your business isn't incorporated and you haven't employed anyone, you are classed as self-employed. Rather than working out FICA and income taxes based on your monthly wage, you need to estimate your tax on a quarterly basis and pay this to the IRS and your state treasury. Similar to the withholding method of taxes, failure to pay on time and to calculate taxes correctly can result in large fines.
This method is used by those who are self-employed, either solely or as a partner, and are expecting to pay less than $1,000 in income tax within a year. Although your estimated taxes are paid monthly, it is a good idea to put money aside for them each month, as failing to ensure you have adequate funds can result in business cash flow issues.
If you provide goods or services, you may also be eligible to pay sales tax. This type of tax is dependent on state and local governments, so the amount you pay or what you have to pay it on, changes from location to location. This can mean that you don't need to pay sales tax on certain services or products, so you will need to check what the rules are for where your business is operating.
No deductions can be made from your payable sales tax based on business costs associated with your sales. Instead, the same rate of tax is payable based on all the money that your business receives in payment of products. They are also referred to as gross receipt taxes because they are a percentage of the total amount of gross receipts you take in.
While it used to be that sales tax was rarely paid by businesses providing services, many areas of the US now impose this tax on services as well. However, it is worth checking whether, if this is the case, you are allowed to pass this tax onto your customers. This isn't always the case, but it is worth looking into.
You can check your sales tax requirements with your state's taxation and revenue department. More information can also be found on the IRS site.