Business Tax: What You Need to Know
Start-Up Tax Issues
Tax-reporting and filing for small businesses is a highly detailed process, and it is critical that today’s business owners comprehend their tax obligations, maintain effective record-keeping procedures and understand how and when to make certain deductions. Additionally, most of today’s small businesses need what is known as an Employer Identification Number, or EIN. The EIN is something like a social security number, but for businesses, and is therefore used to track the tax accounts and related movements of businesses that must pay taxes. It is assigned to a business by the Internal Revenue Service.
One of the first steps in launching a small business is determining what type of business, tax-wise, a company is going to be. How businesses are required to pay taxes at the federal level depends on how a business is classified. For example, tax requirements are different for sole proprietorships than they are for partnerships, and the obligations for partnerships differ from those imposed on corporations, and so on. There are four primary types of taxes that are important for business owners to understand: income taxes, employment taxes, self-employment taxes and excise taxes.
Payment of income tax is required of all companies, though exactly when it is due can vary. Some businesses pay estimated taxes quarterly, while others pay their tax debts all at once at year’s end. Businesses with employees must also pay taxes, among them the federal unemployment tax and social security and Medicare fees. Independent contractors and others who are self-employed face certain self-employment tax obligations as their method of contributing to social security, while the fourth and final tax, excise tax, refers to taxes specific to the purchase or use of particular goods.
Business Tax Basics
With the exception of very few longtime professionals, few people completely understand all the aspects of business taxes. Not only do today’s small business owners need to understand basic business taxes to ensure they stay on the right side of the law, but they can also reap the benefits in the financial sense if they know where to take the right deductions and minimize their tax obligations.
As mentioned, how a business is classified comes into play when it is time to file taxes. Different businesses are required to use different types of forms when filing. For example, many employers who withhold social security or income tax from their workers are required to file a Form 941 or a Form W-2 on behalf of each employee. Independent contractors, or those that essentially employ themselves, follow different tax-filing protocols.
Regardless of the manner in which a business files taxes, most American businesses run the risk of a tax audit. While it is virtually impossible to determine exactly what factors the IRS assesses in determining what businesses to audit, there are a few steps business owners can take to minimize their chances of being on the receiving end. At best, an audit means a whole lot of paperwork and red tape, and, at worst, it could have serious financial and even legal repercussions for your business.
Generally, the IRS looks at a number of different factors in deciding whether a tax audit is warranted. The organization will look at things like how much a business reports as expenses (they may be automotive, entertainment or miscellaneous expenses, among others), and whether a business deals regularly with cash. The IRS also may delve into how many independent contractors a business employs in an effort to ensure the business is still paying its proper tax burden. Another one of the more important things the IRS will likely look for in determining whether to audit a business is whether the business understated its earnings, or “forgot” to report some income. The more of these “red flags” a business has, the likelier its chance of being audited by the IRS.
In the event an audit does occur, it may be wise to call in a professional to assist. Tax matters are extremely convoluted, and business owners shouldn’t worry too much about whether the decision to call in professional help makes them look guilty. The IRS may actually prefer it, and it may save time for all involved in the auditing process.
Business taxes are complicated, but the IRS still expects today’s businesses to fully understand their tax obligations and file accordingly. The more today’s businesses know about the entire process, they less likely they are to find themselves in financial or legal trouble.
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