Fulfilling Your Business Tax Obligations
How to Comply With Federal, State, and Local Tax Regulations
Taxes are a necessary part of doing business. They also are time-consuming and easily error-prone. The taxing authorities provide calendars of due dates and directions for filing your taxes. That said, it is strongly recommended that you consider hiring temporarily or part-time an experienced accountant/bookkeeper to set up your tax filings and schedule of payments.
There are three levels of taxes: federal, state, and local. When you start your business, your first step is filing with your state to set up an LLC, S Corp, or C Corp. You pay a fee and receive a notification from the state confirming that your business is duly registered. Your next step is to get an Employer Identification Number (EIN) from the IRS. It’s free! That’s the easy part.
Now you are official. The next steps include determining what taxes, fees, and licenses you need to run your business. You can find most of the taxes and fees you are responsible for on the taxing entity’s web site. Most forms and payments can be completed electronically although you still have the ability to file and pay by regular mail or telephone. You also can be included in email notices to warn you when tax filings are due.
Filing and paying taxes on a timely basis is essential. Missing a due date, not paying the taxes due, or not filing at all will lead to a torrent of mail. You will be subject to tax penalties and interest and responding to claims is time-consuming and costly. Even if you believe no taxes are due, you still need to file the return. For example, let’s assume you planned to hire employees and you file all the necessary documents to set up the tax filings with the IRS and state taxing authority. You’re now in the system. Let’s further assume that you delay the hiring of employees. At the end of the quarter, even though you have not hired an employee and there are no taxes due, you are still responsible to file the returns.
Remember to earmark funds to pay your taxes on a timely basis. If a payment is going to be missed or you need to work out a payment schedule, it is imperative to contact the taxing authority before you are contacted by it. It is just as important to have someone who is experienced in dealing with federal, state, and local taxing authorities to help you. An experienced tax person can save you thousands of dollars and help you establish a workout plan.
Here are some of the basic forms you will need to file and taxes and fees you will need to pay:
Forms 941 and 940—If you are hiring employees, you need to set up an account with the IRS to pay federal withholding, Social Security, and Medicare. In addition to the withholdings from your employees, you also need to pay the company’s portion of Social Security and Medicare. Payments need to be made monthly. Form 941 is filed quarterly and reconciles your quarterly payments for federal withholdings and Social Security and Medicare. Form 940 is filed annually and calculates the company’s federal unemployment tax due.
These forms can be processed by an outside payroll service along with your regular payroll. For a company with fewer than four employees (the typical threshold for the large payroll services), some of the accounting software companies offer a variety of payroll services for small businesses with no limitation on the number of employees. Your accountant/bookkeeper can suggest the best method for you.
Forms 1040, 1120, 1120S—are income tax forms and are filed annually. If your company is an LLC, you complete a Schedule C and include your income in your 1040; if S Corp, you complete a Schedule E and include your income in your 1040; if a C Corp, you file and pay taxes separately.
Each state has different taxes and filing requirements. Some of the basic taxes include income tax, sales, and use tax, and unemployment tax. Typically, you complete a lengthy form that helps you determine what taxes your company is responsible for and the state sends you ID numbers and filing requirements. It’s then up to you to file and pay taxes on a timely basis.
Income Tax—is filed although estimates are paid quarterly. The state tax form follows the IRS tax form but with some adjustments depending on the state.
Sales and Use Tax—forms are filed and taxes paid monthly or quarterly. A percentage of your income is taxed either on collections or billings. You may have a sales tax exemption certificate to avoid paying sales tax in purchases used in manufacturing the product you sell.
Unemployment Tax—returns usually are paid quarterly. The tax is based on the earnings of each employee with a limit on the number of annual earnings.
City, Local, Municipal Taxes—vary greatly from one taxing authority to another and local taxes may be industry-specific.
Generally, there are licenses, fees, and taxes on:
- Tangible Personal Property—based on the value of assets used in your business such as equipment, and furniture and fixtures
- Inventory valuation
- Licenses and fees may include but not limited to:
- Adult Day Care Facility
- Advertising Space Rental
- Body/Paint/Repair Shop
- Cable TV Franchise
- Catering Service
- Parking Facility
- Pest Control
- Self Storage
- Tattoo Studio
It’s important to go to your local taxing authority web site or call your local office to determine the taxes and licenses and fees you are responsible for.
Obtaining business licenses must be done before starting operations. Depending on local and state regulations, you can be assessed fines for each day you operate without a business license if one is required for your business.
Author: Marc J Marin