As a small family business, we understand the complexities of being self-employed and operating a company. Successful small businesses are important as they account for a significant percentage of jobs throughout the country and help drive our economy. However, managing a business is challenging and it is easy for a company to overlook its tax obligations. Understanding the tax aspects of being self-employed is nonetheless crucial to operating a strong business. At TaxFirm.com, we will walk you through the steps of starting a business and explain your tax obligations.
Typically, the IRS requires you to submit estimated tax payments on a quarterly basis. If you are self-employed and taxed as a sole proprietorship or receive partnership income, then you should submit tax payments through the Electronic Federal Tax Payment System (EFTPS). Once you enroll, a PIN will automatically be mailed to your address. You will need this PIN to continue registration and to make payments. On the EFTPS, you can schedule payments up to 12 months in advance as well as review a history of all your tax payments. (Payments can be directly debited from your bank account.)By submitting estimated tax payments while you earn your income, you should not incur any estimated tax penalties. But more importantly, these payments will help you budget. As a small business, you may be tempted to base your spending habits on your net income and overlook your tax obligation, which can be significant. Paying consistently throughout the year can help mitigate the potential for unexpected significant tax liabilities.
If you have employees or hire independent contractors, then you must submit the appropriate form to them at the end of each year in order to take their expense as a deduction on your return. When you first hire them, you should ask them to complete a W-9 form so that you can obtain their information to complete either a 1099 or W-2 form. These forms will need to be sent to your employee/independent contractor and filed with the IRS.
At TaxFirm.com, we can explain the differences between an employee and independent contractor as defined by the IRS. Employee classification issues frequently arise and this is a commonly audited area by the IRS. Therefore, it is important to be careful when making hiring decisions. Proper classification of all your workers is essential to avoid any unexpected tax issues in the future.
If you have employees (as compared to independent contractors), then you must file Form 941s and Form 940s along with your state payroll returns by the required deadlines. You must also timely remit all payroll taxes associated with each employee to the IRS and your state tax agency. Payroll taxes include trust fund taxes, which are essentially federal income tax, social security tax, and medicare tax that is withheld by the employee. As an employer, you are also responsible for matching the social security and medicare tax. These taxes must be reported to the IRS through a quarterly Form 941 and submitted by the appropriate deadline.
If you have several employees, you may want to consider hiring a payroll service, such as ADP or PayChex to help you meet your reporting and payment obligations. At TaxFirm.com, we can discuss what you need to do to successfully adhere to the payroll tax rules.
For certain businesses, you may be required to pay sales tax. Similar to payroll tax, this is frequently submitted to the state tax agency and must be paid on a timely basis. At TaxFirm.com, we can discuss whether you are subject to the sales tax rules for your state.
It is important to keep a separate account for your business and not to commingle personal and business expenses. Habits such as these lead to difficult audit situations where you may have inadvertently deducted a personal expense you were not entitled to. The IRS frequently audits small businesses and it is essential that you keep documentation for all your business expenses. You have the burden of proof when it comes to your tax liability. At TaxFirm.com, we can discuss steps you can take to make yourself prepared for an audit and ensure you are deducting the appropriate expenses.
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