If you’re new to business, then wrapping your arms around your tax obligations can seem like an uphill task. The first question you need to ask yourself is which tax laws impact your business from the get-go? It may be safe to assume that your tax obligations kick in once you start making a profit. Not necessarily. Each business is different.
If you hire employees, you’ll have payroll tax obligations. If you operate a retail business, there’s sales tax to deal with. Then there are quarterly estimated tax payments (the self-employed equivalent of withholding).
To help you navigate the business tax landscape, here’s a quick overview of key tax obligations that may impact you.
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Understand how your Business Structure Impacts your Tax Obligations
How you legally structure your business will affect your tax situation. For example, if your business is an LLC, the LLC gets taxed separate from the owners. While sole proprietors report their personal and business income taxes on the same form (Form 1040).
At the state level, you will encounter several tax obligations – sales tax, property tax, income tax, unemployment insurance tax, and more. The SBA offers more information on how your business structure determines your tax obligations (plus links to the necessary forms and portals for registering your business with the right tax authority):
Get a Federal Tax ID
An Employer Identification Number (EIN) is the business equivalent of your social security number. It’s is required by businesses who have employees, operate as a corporation or partnership, and other obligations. For the most part sole proprietors don’t need and EIN and can operate using their social security number. Does your business need an EIN and how do you get it? Learn more.
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Pay Estimated Taxes
This one is easily overlooked, especially if you are new to business and previously had all your income tax payments taken care of through withholding. Each quarter, self-employed business owners must estimate their federal and state income tax payment and send a check to the IRS and their state treasury. This “pay-as-you-go” model applies to sole proprietors, partners, and S Corporations who expect to pay $1,000 in income tax in one year. The threshold drops to $500 for Corporations.
To help you calculate your estimated tax, check out the IRS Estimated Tax guide. Consult your state’s treasury office (you’ll find website links for each U.S. state here) to get the appropriate tax voucher or pay online.
It’s very important that you set aside sufficient to meet your estimated tax payments or you risk a cash flow problem. And don’t forget to keep good records of your income and expenses. The latter can be used to offset how much estimated tax you pay.
Sales Taxes – Does It Apply to You?
Sales tax applies to certain retail products (rarely services) and if your business has a physical presence in a state, such as a store, office or warehouse, you must apply for a sales tax permit and collect applicable state and local sales tax from your customers. That tax is then passed on to your state revenue office on a monthly or quarterly basis. Determining whether your business qualifies as having physical presence in a particular state (say, if you own a warehouse in Virginia but sell your services in Pennsylvania) and the implications on sales tax collection can be confusing. Certain states are exempt from sales tax including Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon.
Employment Tax – Withholding and Matching
If you start your business and immediately have employees on payroll, you’ll need to withhold Social Security (FICA), Medicare and federal and state income taxes from their salaries. You must also match your employees FICA and Medicare taxes and pay this matching along with your employee’s tax.
The IRS Employment Taxes guide has all the information you need to understand how you deposit and report employment taxes, key due dates, and more. Take a look at this guide to hiring your first employee too.
Working with Freelancers and Independent Contractors? – Know your Tax Obligations
Bringing on a self-employed contractor brings with it additional tax ramifications, especially if your business accidentally or deliberately misclassifies that individual as an employee. Read more about why it’s important to know the difference and how it can impact your tax situation.
Bookmark Tax Reporting Season in Your Calendar
The new year brings with it several tax obligations for employers. While you’re busy thinking about getting your income tax return filed, don’t forget your wage reporting obligations (W2s must be filed) and 1099 forms must be filed and issued to independent contractors you’ve worked with during the tax year.
Your local government (town, city, or county) collects property tax for business assets such as vehicles, computer equipment, software, and more. Likewise, if you do business in a commercial real estate location, the state will collect property tax on it. Check with your local tax authority to find out what you need to do to register your property and the process for assessing and making payments.
Credit: Caron Beasley via Small Business Association
Photo Credit: CreditSesame.com
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