Small Business Tax Information

Overview

It is important for small businesses to plan ahead for taxes. Many small businesses do not have the luxury to hire an in-house accountant or accounting department. As a result, small business operators are responsible for keeping detailed records of profits, expenses, and employee records.

To track your business's expenses and health, you need keep records of two financial statements: a profit and loss statement and a balance sheet. Depending on your business, you may need to prepare cash flow statements and change in capital statements, which are documents that illustrate whether and how your business is changing.

Small business tax obligations vary based on a variety of factors including business size, business type, and business locations. Business owners, legal consultants, and tax advisors should familiarize themselves with the following obligations:

• Federal taxes
• Employee and payroll obligations for federal, state, and local taxes
• State and local sales tax obligations
• Use taxes
• City business license tax information

Employees & Independent Contractors

The Internal Revenue Service (IRS) pays special attention to small businesses that hire independent contractors. In general, businesses have many tax obligations for their employees.

Independent contractors should not be considered substitutes for regular employees, and companies should be careful when hiring independent contractors since the IRS is vigilant to ensure that businesses are not trying to avoid certain taxes and legal obligations. Along these lines, a business must be careful to classify its employees and independent contractors correctly. A misclassification could result in extensive problems for the business.

For employees, businesses are responsible for withholding wages and paying certain taxes including unemployment taxes. Businesses must give each employee a W-2 Wage and Tax Statement form, which explains the employee's total wages and withholdings for that tax year.

A business must report independent contractor payments of $600 or more to the IRS using a 1099 Miscellaneous Income form.

Legal Status

Your business's tax obligations vary based on your business's legal classification. Consultants, sole proprietors, contractors, single-owner LLCs, and multi-member LLCs have unique tax obligations. Businesses should have an understanding of their tax obligations ahead of time. Proprietorships have a single owner, partnerships have two or more owners, and corporations have artificial entities that are considered owners. Your business may need a license or permit to operate in your area.

Forms

Understand your business's tax obligations before completing any forms. The way that you define your business will help you understand what your business pays in taxes. All necessary forms for corporations, international businesses, partnerships, and small businesses are available on the IRS website. The IRS supplies additional information regarding employer ID numbers, accounting methods, deductions, employment taxes, and independent contractors.

Business Deductions

Certain federal and state deductions are available for small businesses. These include: home offices, meals, entertainment, travel, startup expenses, business gifts, casualty losses, employee pay, employee benefits, owner's compensation, and company automobiles. Deductions are unique for each business. In general, deductions are not available for municipal business license taxes.

Services

Businesses that lack the resources to maintain a payroll department can hire a payroll service to maintain records of employee information. A payroll service monitors paycheck deductions and fulfills employer tax obligations.

A variety of services are available to help businesses maintain records of important employee forms.

Many new businesses should consider a payroll service in conjunction with a certified public accountant (CPA) or tax advisor. These resources help businesses remain in compliance with complicated tax laws and legal obligations that are difficult to understand. With the help of experts, tax planning is straightforward.

Software is available to help small businesses file taxes. Products are available to help small business owners file taxes that are relatively straightforward. A business that needs help without requiring a CPA could benefit from tax software. TurboTax, a popular personal tax program, has packages available for sole proprietors, consultants, contractors, or single-owner LLCs. There are also packages available for corporations, partnerships, and multi-member LLC companies.

Filing Late & Paying Late

The IRS encourages businesses to pay taxes on time and in full. The business must make a reasonable effort to pay taxes. If a reasonable effort is not made, the IRS can require a business to sell its assets or get a loan. Payment plans and arrangements are available, and oftentimes, the IRS will charge interest on late payments. The IRS encourages businesses that cannot pay in full to pay as much as possible. The business could be eligible for an extension, payment plan, compromise, or delay.