Small Business Taxes
Small Business Taxes and Employees
Employment Taxes are very complex. If you do them yourself, you are bound to make costly mistakes. It is advisable to have an outside firm manage employment taxes and paychecks. If the firm makes a mistake, it typically pays the penalty. (Verify this in your service contract.)
For your employees, you must withhold federal income tax and other earnings-related taxes from every check.
Before paying your employees
Your employees need to fill the federal W-4 (Employee’s Withholding Allowance Certificate) and I-9 (Employment Eligibility Verification) forms from the U.S. Immigration and Naturalization Service (INS).
You, or your filing company, must determine the right amount to deduct from your employees’ paychecks. State withholding tables are available from the New York State Department of Taxation and Finance, http://www.tax.state.ny.us
You are also required to withhold Social Security and Medicare taxes. Tables for these taxes can be found in the IRS Web site: http://www.irs.gov
As an employer, you are required to pay for Medicare and Social Security expenses. Moreover, depending on how long you have employed an individual, you will need to pay for that employee’s unemployment insurance. Many factors are taken into account when calculating these taxes including the size of the firm, date of hire, and balance on the unemployment insurance account.
Make sure to file all payroll tax returns and make the tax payments promptly. Keep in mind that the IRS routinely audits businesses that hire independent contractors, as these workers provide tax savings over a regular employee. For more information, refer to the New York State Department of Taxation and Finance Web site.
In New York, a small business needs to collect sales tax if it is selling a product or offering a service that is taxable. To learn if your business will need to charge New York sales tax, refer to Publication 750, available for download from the New York State Department of Taxation and Finance here.
Certificate of Authority
The process of getting a Sales Tax ID is called “obtaining a Certificate of Authority.” You have probably seen an example of one in the stores you shop at; generally, it is on the wall behind the cash register. To obtain the Certificate of Authority you will need form DTF-17 “Application for Registration as a Sales Tax Vendor.”
You can download this form here.
You need to apply at least 20 days (but no earlier than 90 days) prior to when you expect to begin your operation
Your earnings will be taxed according to your company’s business structure and income amount.
If your business is a sole proprietorship, you will report your business gains or losses on your personal income taxes. The form that you will need is your usual
IRS Form 1040 with a Schedule C, Profit or Loss from Business, attached (available at http://www.irs.gov).
For partnerships, you will also report the business earnings on your personal income tax return. The partnership must file an IRS form 1065, U.S. Return of Partnership Income, which defines each partner’s share of the profit or loss in the business, along with your return each year. Furthermore, each partner must make quarterly estimated tax payments each year.
If you incorporated your business as an S corporation, any business earnings are passed to you; therefore, you need to declare these earnings on your personal income taxes. If you set up is a Corporation, then you will have to file a separate return for your business.
For a single-owner LLC, you just need to submit a schedule C with your tax returns. A multi-owned LLC will need to file form 1065, U.S. Return of Partnership Income here.
Furthermore, the LLC members need to file IRS Schedule K-1, which breaks down each member’s shares of the business’s profits and losses. The LLC members must report their profit and loss information on their 1040, adding Schedule E here.
If IRS suspects a problem in your tax application they can audit your business. The audit can go pretty extreme where they dig deep into the business records. This is traumatic for any business and usually very costly.
When being audited one of the big costs will be the extra fees you pay your accountant to put the books in order and meet IRS officials. Make sure you ask your accountant if they offer "audit insurance". With audit insurance you will end up paying an extra monthly fee to your accountant, but if you ever get audited it will come in very handy.
Naturally, you will pay taxes on any real estate that your business owns. However, if you lease commercial property instead, you may still be required to pay the property taxes. If the lessor pays the taxes (named base-year taxes), then the lessor will pay an amount based on the amount paid the year before the lease agreement is signed, and the lessee will be responsible for any increment on those taxes going forward.
Other taxes may be applicable to your business, such as inventory tax, personal property tax, and other taxes applicable to specific industries. Check with a tax professional for more information.
When filing returns, remember that your lifestyle needs to match your tax return, so beware of an audit if you are living like Sultan and declaring income like a pauper. One of the things they look at is the income level of the neighborhood you live in. If you are living in an extremely wealthy neighborhood but are showing very little income, it may trigger some IRS flags.
For more information on taxes and business expenses proceed to the next section. Common Business Expenses