Tax law is very complicated, especially for small businesses. Employers are required to collect income withholdings from their employees, and there’s a self-employment tax for individuals who work for themselves. It doesn’t matter what type of business you’re operating (with employees or without, and even freelancing), the IRS demands that you pay. If you don’t pay you’ll face penalties and, in some cases, criminal charges.
The following lists the different types of taxes your business may have to deal with. Keep in mind, tax credits can help you lower your effective tax rate. The ADP SmartCompliance tax credits module has a database of more than 3,000 incentives and can help you claim and keep all the credits available to you. Achieving the lowest possible tax rate is complicated (less so when you outsource the effort), but the savings are worth it. At tax time, your business has two goals: be 100 percent compliant in order to avoid financial penalties/fraud charges and save money.
Payroll Taxes aka Employment Taxes
If you have employees, you absolutely must collect withholding tax. The IRS calls these tax responsibilities Employment Taxes. Every check is subject to withholdings, regardless when an employee is paid (weekly, bi-weekly, etc.). This money is deposited in a withholding tax fund until tax time, which is when it’s paid to the IRS.
The following taxes must be collected from every employee and yourself. Use the IRS’s withholding tables to determine how much to hold back for each fund.
- Federal income tax
- Social security and Medicare
Here’s a warning, you shouldn’t ignore: do not borrow against your withholding tax fund. If this money can’t be paid back, the IRS will consider you a criminal. In the eyes of the government, employers who borrow from saved employment taxes are stealing from their employees. You will be prosecuted.
Annual Income Tax Return
Excluding partnerships, all businesses must file a tax return. Partnerships should file an information return and individual returns but, otherwise, businesses should file a tax return. Your employee’s taxes are paid through the withholding fund, but business taxes are paid out of pocket. You must pay your income tax as-you-go, just like your employees. Sometimes, you can opt to pay an estimated tax and this doesn’t require as-you-go payments.
FYI: It’s on this form that you will include your tax credits.
If you don’t have employees but you’re operating a business, you’re obligated to pay self-employment taxes at the end of every year. You can opt to pay as you go, or you can pay at the end of the year when you file. Your tax payments are important because they contribute to your financial future, such as your ability to collect social security.
You may be able to write off some of your business expenses, especially if you paid sales tax on certain items.
In general, self-employment taxes must be paid on any received payments that weren’t already subject to payroll taxes. This includes:
- Home-based business income
- Freelance work income
- Independent contractor work
- Untaxed earned income
- Business income, unless taxes are already paid
Not all businesses have to pay excise taxes. If you meet the requirements, you’ll be asked to file a specific form and pay the resulting tax. The IRS lists the following as examples of excise tax:
- Environmental taxes
- Communications and air transportation taxes
- Fuel taxes
- Tax on retail sale of heavy trucks, trailers, and tractors
- Manufactures taxes on sale or use of a variety of different articles
There you have it: the taxes you may or may not be subject to. This is a very basic look at business taxes. You absolutely must dig deeper to ensure you’re not subject to penalties because you made a mistake. The best way to ensure safety during tax time is to educate yourself and follow the advice of your tax accountant.