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How to File and Pay Business Taxes

August 25, 2015  |   Tax Advice   |   Tags: , ,  

To file taxes, business need to have an Employer Identification Number (EIN). If you are starting a business, you can apply for an EIN for free through the IRS website. Alternatively, U.S. companies can apply for an EIN by filing Form SS-4 and mailing it to Internal Revenue Service, EIN Operation, Cincinnati, OH 45999.

small-business-taxes

Your EIN is like a Social Security number for your business. You can use your EIN for opening bank accounts, and reporting and corresponding with the IRS. Make sure that you keep your personal and business identity separate to avoid confusion in calculating and filing taxes. The bulk of the work, however, lies with business taxes. Forbes shares the tax filing and paying requirements that businesses need to keep in mind to avoid mistakes and the risk of an audit.

“Income Tax

“All businesses (refer to this handy primer for explanations about business entities) file some sort of annual return. For federal purposes, sole proprietors and SMLLCs will report and pay using their individual income tax return, a form 1040 (downloads as a pdf). Entities taxed as a partnership will report using a form 1065 (downloads as a pdf). Entities taxed as a C corporation will report and pay using a form 1120 while the C corp’s cousin, the S corporation, will report and pay using a form 1120s (downloads as a pdf).

“Estimated Tax

“Depending on the amount of income received during the year, you may need to make estimated payments. This is true not only for individuals but for corporations, too. Failure to make enough payments during the year can result in penalties and interest come tax time so be sure to plan in advance. If you don’t need to make estimated payments, you will pay when you file your return each year.

“Payroll Tax

“When you own a business and pay employees, you are responsible for payroll taxes. The most well know, Social Security and Medicare taxes, are fixed by rate. For 2015, the employer portion of Social Security tax is 6.2% with a taxable wage base of $118,500 (wages over that amount are not subject to Social Security tax). The employer portion of Medicare tax is 1.45%. There is no wage base limit for Medicare tax (in other words, all wages are subject to Medicare tax).

“As the employer, you pay the employer share (6.2% for Social Security tax and 1.45% for Medicare tax) on behalf of your employees. You are also responsible for collecting and remitting the employee portion: you do that by withholding those amounts from your employees’ paychecks. Those numbers are the same for 2015 for employees as for employers (6.2% for Social Security tax and 1.45% for Medicare tax). However, as the employer, you are also responsible for collecting the Additional Medicare Tax of .9% on wages in excess of $200,000 (this is a new tax as part of Obamacare). There is no employer match for the Additional Medicare Tax.

“On top of those taxes, you must withhold federal income tax from your employees’ wages. You’ll figure out how to withhold by asking your employees to complete a form W-4 (downloads as a pdf). You don’t file those forms W-4 with IRS but you do hold onto them for your own records.

“Once you collect those withholdings, you must deposit them with IRS according to a schedule. The schedule is determined by how much money you collect and is typically monthly. You’ll also report those deposits to IRS. And this is where things can get a little nutty. Your reporting frequency may be different from your deposit frequency. In fact, it is not unusual at all for your business to be required to deposit payroll taxes on a monthly basis but to report those deposits on a quarterly basis. Pay close attention to the due dates for both.

“Speaking of paying attention, this is the most important part of the entire article. Lean really, really close to the monitor and read carefully. Payroll taxes are often called trust fund taxes. This is because, as you just read, you are required to collect and remit those taxes on behalf of someone else – in this case, your employees. Unpaid payroll tax liabilities do not disappear. If you close down your business or move away, those liabilities stay with you – and they stay with you personally. Remember all of that stuff I said about separating personal and business liability? It flies out the window when it comes to trust fund taxes. You can be on the hook personally if you don’t pay. Declaring bankruptcy, etc., doesn’t generally absolve you either. Failing to remit those taxes cannot only result in penalty and interest, it can also result in criminal prosecution. So tread carefully here. Don’t ignore your payroll tax liability.

“Unemployment Tax

“As a business owner, you may also be responsible for paying Federal Unemployment (FUTA) Tax if you paid wages of $1,500 or more in any quarter during the year or if you had one or more employees for at least some part of a day in any 20 or more different weeks during the year. The rate of tax for FUTA is 6% on the first $7,000 you pay to your employees during the year. You may be able to offset that amount with taxes you paid to the state for unemployment tax. This isn’t considered a proper ‘payroll tax’ since this is an employer only tax, there is no employee portion.

“Self-Employment Tax

“If you are a sole proprietor or have no employees, you are responsible for Self-Employment tax (SE). SE tax is the individual equivalent of the employer piece for Social Security and Medicare taxes. In a typical employer/employee relationship, the employer pays a share of Social Security and Medicare and the employee pays a share of Social Security and Medicare taxes. When you work for yourself, there’s no employer to pay the employer portion – so you have to pick up the slack.

“Generally, you must pay SE tax if your net earnings from self-employment were $400 or more. Special rules may apply to those who work for churches, government employees and others (be sure to check with your tax professional to see if any of those special rules apply to you).

“Excise Tax

“Excise taxes may also apply if you perform certain kinds of services or manufacture and sell certain goods. This generally includes ‘sin taxes’ (think alcohol and tobacco) as well fuel taxes, air transportation taxes and more. Many of these taxes are reported on a form 720 (downloads as a pdf). Give the form a once over – as well as check with your tax professional – to find out whether you might be required to pay any excise taxes.”