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Small Business Owners: What you need to know about Business Taxes

May 01, 2015  |   Tax News   |   Tags: , ,  

All businesses must file a tax return except partnerships. Partnerships are required to file an information return. If you are running a small business, you probably are a sole proprietor or a partner. Here are some of the important tax and filing information that you should know about.

small business taxes

Employer Identification Number

If you have employees and pay wages to them, you will need an Employer Identification Number (EIN). If you have no employees and you are the sole proprietor of your business, then you do not need an EIN for tax purposes. However, you might need an EIN for setting up a business account in bank or when dealing with other businesses. Even if you do not use an EIN for tax purposes, the IRS will provide you one upon request.

The taxes that a small business (SB) is usually required to pay are:

  • Estimated tax
  • Self-employment tax
  • Employment tax
  • Excise tax

Estimated Tax

An employer withholds an employee’s taxes from their paychecks and pays it to the IRS using Form W-2. If a SB does not pay taxes through withholding, it may need to pay estimated taxes. If a small business is not required to pay estimated tax, the employer(s) may pay the taxes when their return is filed.

Self-Employment Tax

Generally, you are required to pay self-employment tax if your net earnings from self-employment were $400 or more. For example, if you are a sole proprietor and do not have employees, and your income is over $400, you then pay self-employment tax (SE tax). SE tax is primarily used for Social Security and Medicare tax.

Employment Tax

If you are a small business with employees, employment taxes cover the following:

  • Social Security and Medicare taxes
  • Income tax withholding
  • Unemployment (FUTA) tax

As an employer, you are required to deposit and report employment taxes. Generally, employment tax includes the federal income tax withheld, and the employer(s) and the employees’ Social Security and Medicare taxes.

You can make the deposits monthly or semi-weekly. Use Publication 15 for Forms 941, 944 and 945, or Publication 51 for Form 943 to know which payment schedule you are required to use.

Excise Tax

Excise tax is paid when you purchase a specific good. The tax may be included in the price of the product. You are required to pay excise tax if you:

  • Manufacture or sell certain products
  • Operate certain kinds of businesses
  • Use various kinds of equipment, facilities, or products
  • Receive payment for certain services

For more information, go to Excise Tax on the IRS website – irs.gov.

Tax Forms to Use

A sole proprietor uses Schedule C or Schedule C EZ, Net Profit from Business, to file taxes. The Schedule C is included in Form 1040. A sole proprietor also files Schedule SE, Self-Employment Tax, to report Social Security and Medicare taxes on net profits.

A partnership is required to file an annual information return to report income, expenses, gain and losses. A partnership does not pay income tax, but passes over the profits or losses to the partners. Every partner then files his or her tax return to show their share of income or loss. As partners are not employees, they are not given Form W-2. Instead, the partners are required to use Schedule K-1 (Form 1065).

To understand which taxes you are legally required to pay depending upon your type of business and its specifications, you may use professional assistance to prepare and file your taxes. This will help you to avoid delays and remain compliant with tax laws.