By Barbara Weltman, The Blueprint
Taxes are a fact of a business owner’s life. You can’t avoid it, but
you can make sure you do it right, minimize your costs, and avoid
audits, penalties, and other problems.
Understanding the scope of
your tax responsibilities and deciding whether to do it yourself or seek
professional help are important in ensuring your business success.
Overview: What business taxes are you responsible for?
The
type of taxes you have to deal with, who pays the taxes, and who
reports them to the government depends on what type of business entity
you file as and the nature of your business.
Some businesses may have limited tax obligations, while others have many.
Income taxes
Every
business must report annually on its income and expenses. If your
business is a regular corporation (“C corporation”), the corporation
files its own tax return and is a separate taxpayer for income taxes. It
pays a flat 21% tax rate on profits.
If your business is a
pass-through entity -- a sole proprietorship, partnership, limited
liability company (LLCs), or S corporation -- an annual return is filed
for the business, but income flows through to owners and is reported on
their personal tax returns.
The rate that owners pay depends on
their personal tax bracket, which is affected by their income (including
their share of business profits) as well as their filing status, and
various other considerations.
The following are the annual income tax filing statuses for businesses.
Sole proprietorships (including dependent contractors): Schedule C, which is filed with Form 1040 or 1040-SR.
Partnerships and LLCs:
If you have two or more members that don’t opt to be taxed as other
than a partnership, you will use Form 1065. Each owner receives a
Schedule K-1 reporting his/her share of business items.
S corporation: Form 1120-S. Each owner also receives a Schedule K-1 reporting his/her share of business items.
C corporation: Form 1120
You
may also have state-level income taxes. If you do business in more than
one state, you have to apportion your income and other items to
determine how much to pay to each state. The rules on apportionment vary
considerably, so check with your state tax, revenue, or finance department.
Payroll taxes
If your business has any employees, including you as an owner-employee, you must contend with payroll taxes (also referred to as employment taxes).
As
an employer, you are required to withhold federal (and where
applicable, state) income taxes. You don’t have a choice. The amount
withheld depends on the Employee’s Withholding Certificate.
The
amount withheld is then paid to the government, usually through
depositing the taxes according to an IRS-set schedule for your business.
Social
Security and Medicare taxes are paid together through FICA tax. The
employee pays tax on his or her taxable compensation (with limits
applicable for the Social Security portion). The employer pays a like
amount and then deducts the employer payment.
These taxes, along
with income tax withholding, are reported to the IRS quarterly (there’s
an annual report for very small employers). FICA, like income tax
withholding, is deposited with the government as explained earlier.
FUTA
tax is federal unemployment insurance paid entirely by the employer.
The tax rate is usually reduced by a credit for state unemployment tax
(below). There’s an annual report for this tax.
Like FUTA, there’s
a state-level tax for unemployment insurance. The rate of tax paid
varies according to an employer’s claims experience (how many former
workers received unemployment benefits).
Employers don’t have to
pay any taxes other than those listed above (there are a few state-level
exceptions), but are required to withhold from an employee’s paycheck
for other purposes:
- Additional Medicare tax of 0.9% once an employee’s compensation exceeds $200,000 for the year.
- State temporary/short-term disability, paid family leave, and unemployment benefits in a handful of states.
- Employee benefits paid by employees on a pre-tax basis (it’s not income to them), such as contributions to 401(k) retirement plans and dependent care accounts.
If you are self-employed, you don’t have
compensation on which to figure FICA and FUTA taxes. You do, however,
have to pay Social Security and Medicare taxes through self-employment
tax. This tax, which is essentially both the employee and employer share
of FICA (with the employer share deductible), is usually paid through
quarterly estimated taxes.
Sales taxes
As a seller, you
don’t pay sales tax on your goods and services. But you may be required
to collect sales tax on your goods and services and remit them to your
state (Alaska, Delaware, Montana, New Hampshire, and Oregon do not have a
sales tax).
If you sell to buyers out of state, you may even be
required to collect sales tax for that state. In addition to collecting
and turning over the sales tax, you must also file reports about your
sales tax activity.
Property taxes
If the business owns real estate, it must pay local property taxes. Payment dates for this vary by location.
Should you prepare your business taxes yourself or use a professional?
The
answer depends entirely on your situation -- the complexity of your tax
situation and your comfort level in handling your business taxes. For
example, if you’re a sole proprietor with no employees, you don’t have
to worry about payroll responsibilities. But you do need to stay
informed about tax changes so you can take advantage of tax breaks and
plan effectively for the future.
Using accounting or tax software for your business taxes
Fortunately,
if you decide to do it yourself, there are accounting and tax return
preparation options -- software or cloud solutions -- to help you. These
options let you track your income and expenses throughout the year so
you can easily complete an income tax return. Here at The Blueprint,
we’ve rated the best small business accounting software to help you make the right decision for your tax situation.
Options such as TurboTax Business or TurboTax Home and Business, TaxAct Business, and TaxSlayer Self-Employed let you prepare and file returns. The one to choose depends on your type of business and cost.
The
vast majority of small business owners don’t do their taxes themselves.
If you think taxes are beyond your capabilities, or you just prefer to
devote your time to running your business and let professionals handle
your taxes, be sure to find the right type of tax pro for you.
Doing
this will ensure you get the appropriate help and advice while
minimizing the cost of professional fees. You may use a professional
once a year for income tax returns or rely on one throughout the year
for your other tax responsibilities, too.
Using a tax professional
Your options for a tax professional include:
- Attorneys: Look for those specializing in tax preparation and planning. They can represent you before the IRS and can take a case to court if necessary. Fees for attorneys vary with location and what you need them to do.
- CPAs: Certified public accountants, like attorneys, can represent you before the IRS. Fees for CPAs also vary with location and what you need them to do.
- Enrolled agents: These are individuals licensed by the IRS who’ve completed an exam and meet continuing education requirements. They, too, can represent you before the IRS. Typically, the fees charged by enrolled agents are lower than those of CPAs.
- Annual filing season program participants: These individuals do not have the credentials of those above but have voluntarily completed an IRS program for special certification. They have only limited representation rights before the IRS.
- PTIN holders: These individuals have not demonstrated any tax-related education but do hold a special tax identification number authorizing them to prepare tax returns for compensation. They have only limited representation rights before the IRS.
- Payroll providers: Instead of doing payroll in-house, you can use an outside payroll company. The company figures withholding and can make deposits and file tax forms on your behalf. Keep in mind, though, that as an employer, you remain fully responsible for payroll taxes; if a provider makes a mistake, you’re on the hook to the government (although you do have legal recourse against the payroll company).
How to find a tax professional
As
with any service you use in your business, choose a tax professional
carefully. Ask other business acquaintances for referrals. Use an IRS directory, where you can search by credentials and location.
The IRS cautions
against using “ghost” tax return preparers, who are unscrupulous and
can leave you vulnerable to an audit. You can usually recognize these
bad apples because they require you to pay in cash, take fake
deductions, or invent income in order to take tax credits -- they also
often refuse to sign the return.
Final thoughts on preparing your business taxes
In
the end, the decision on who should prepare the return for your
business is yours. It depends on the complexity of your situation, your
comfort level with handling this chore, and the time you can devote to
it.
The IRS has extensive information through its Small Business and Self-Employed Tax Center to help you with your tax responsibilities. Also, check with your state so you don’t overlook anything.
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