Most importantly, get an Federal Employer Identification Number from the IRS. Assuming that you are not planning on operating a sole proprietorship without employees, you need to send the IRS information about your business. Use IRS form SS-4. Do this just after you create your business entity. (Banks, customers, suppliers, etc. may ask you for this number so you really should get one as soon as possible.) Apart from that, some pretty good free information can be obtained at the IRS website. They have publications for businesses which can be downloaded for free (everybody loves free!). To get to the IRS website offering free business information, click here.
Here are the basic federal taxes that your business may have to pay, depending on the state you live in and the type of business you operate.
1. Income Taxes on the Business and the Owner and How to Pay Them: Once a year, businesses will have to report to the IRS and (probably) the state tax agency the amount of money earned by the business in the prior year. The actual amount of federal income tax that your business pays each year is determined partly by the type of legal entity you have created. Therefore, the different legal entitiesfile different forms with the IRS.
Sole proprietors file IRS form Schedule C along with the owner’s regular 1040. If your sole proprietorship business has net income, then you must also file Schedule SE along with the regular 1040 to determine the Social Security and FICA taxes you must pay.
Partnerships, limited partnerships and limited liability companies file IRS form 1065 to report partnership income (but remember that you will have to report your share of the partnership’s income on your 1040 return as well). Just like for a sole proprietorship, please note that as a partner in a general partnership you are required to file Form Schedule SE. (See discussion immediately above)
A C-Corporation files 1120 or 1120-A. Remember that the C-Corporation must pay income taxes on its profits and the stockholders must also pay taxes on the dividends they receive (this is the infamous “double taxation of C-Corporations). So the corporation’s profits will be taxed as it receives income, and then taxed again when those profits are distributed to the shareholders. Moreover, if you are an employee of the corporation as well as an owner, you need to pay income taxes on the salary paid to you.
S-Corporations file IRS form 1102-S.
Note that as far as the IRS is concerned, you and your business are two separate entities, and both had better have their taxes in order!
2. Income Taxes on Employees and How to Pay Them:
Withholding (Income) Tax: If you have employees, you have the headache of withholding taxes from their paychecks and periodically sending that money to the federal government. Each time you hire an employee, that new employee needs to fill out an IRS Form W-4, listing the the exemptions and additional allowances claimed by the employee. You then use this form to withhold the proper amount from the employees’ paychecks, and send that money on to the federal government. At the end of the year, you must give each employee an IRS Form W-2. The W-2 will simply list the amounts withheld from the employees’ paychecks and sent to the federal government. There must be a separate copy of the W-2 for each of the taxing jurisdictions (federal, state, and local governments) plus one more for the employees’ records. You will also have to send a copy of the employees’ W-2s to the IRS yourself. Also, if your business involves more than $20/month in “tips” to employees, your employees must report such tips to your business. Your business then has to withhold the appropriate amounts from the employees’ wages.
Social Security/Medicare/Unemployment Taxes: Social Security, Medicare, and Federal Unemployment taxes will all have to be paid if you have employees. Social Security and Medicare taxes must be withheld from the employees wages and your business will have to match the employees’ “contributions” to these federal programs. These taxes are paid together and appear on the annual tax return for the business. And just like the income tax, if your business involves more than $20/month in “tips” to employees, you need to account for these tips as part of these payroll taxes.
If you have employees during the course of 20 weeks of the year or you paid your employees a total of more than $1,500 in a year, you probably have to pay the federal unemployment tax. The federal unemployment tax, unlike Social Security and Medicare, comes solely out of your own pocket, with no contribution from the employee. Note that if your business’ federal unemployment tax burden exceeds $100 per quarter for two quarters, then you need to make monthly deposits of the money owed. Form 940 is used annually for a business to report its Federal Unemployment Tax due. Please note that IRS form 940EZ can be used by a business if your business (i) has employees in only one state, (ii) pays all state taxes sums due by the 940EZ date, (iii) the Federal Unemployment Taxes paid are also taxable by the state governments.
To Pay Federal Taxes on Employees:
Paying federal business taxes requires two actions: (1) EACH QUARTER, using IRS Form 941 , report the income and payroll taxes withheld from the employees’ paychecks and, (2) EITHER MONTHLY OR SEMI-WEEKLY deposit the funds you have withheld by sending a check to a bank authorized to receive money on behalf of the IRS.
Reporting must be done every financial quarter. Money deposits of payroll taxes must be done every month or every other week, depending on the size of your payroll contributions. For the first year of your business, deposits will be monthly. After that, the IRS will tell you how often you must deposit the withheld payroll taxes.
3. Excise Taxes on Businesses and How to Pay Them: Federal excise taxes are imposed on the sale or use of certain items of property or certain transactions and on certain occupations. If your business involves firearms, alchohol, motor fuel, trucks, or gambling you really need to look into the excise taxes. Depending on the type of business you operate, your business may have to pay excise taxes. IRS Form 720 lists the broad categories that this tax applies to. Form 720 needs to be filed every fiscal quarter. If your business uses heavy trucks, buses, or trailers, on public highways, then your business may have to pay a special excise tax levied on such vehicles and IRS Form 2290 would have to be filed.
Depending on your home state’s laws, you will need to file sales tax, employee withholding tax, income tax, and possibly others. The best way to find out exactly what you will need to file is to either contact a local accountant, or, if you want to save some money (and that is why you are here after all), contact the state yourself. The state tax departments often have guide books to help small businesses (and large businesses) comply with the tax code. Click here for a list of links to the individual state tax agencies’ websites.
Your state will almost certainly require your business to have an employer identification number issued by the state. Your state employment development office can provide you with more information and the proper forms. (Do not confuse the number assigned to your corporation, partnership, or LLC by the Secretary of State with the Employer Identification Number. These are two different numbers, issued by two different state agencies.)
Again, just like federal taxes, there are legal penalties for not paying state taxes, and these penalties include criminal penalties.
Now you definately need to consult your local authorities. There really is no way to guess what possible local taxes, fees, etc. you may be subject to, so we can only tell you to contact your local government office in charge of revenue.
But remember that there are multiple levels of local taxation. There may be a county assessment on assets and a city or municipal tax on income.
If we can give you two last bits of advice, here they are. First, get professional help with your taxes. We know that it is expensive, but even if you have to use a young person just getting started in the accounting/tax law field, it will probably be worth your money. Paying taxes are enough of a bitch, don’t try to figure out the laws too.
Second, as we said before, get a good computer program–AND USE IT! If you use a program like Quickbooks to keep track of your receipts and disbursements and balance your books according to a regular schedule, tax calculations and professional advice should not too costly.