Steps to filling employment tax – Running a business with employees adds several line items to your tax responsibilities. Employers are required to report and deposit employment taxes, such as federal income taxes, Social Security taxes, and unemployment taxes (FUTA).
Depositing Employment Taxes
You must deposit any federal income tax withheld, as well as employee and employer Social Security and Medicare taxes, according to the IRS website. Taxpayers can determine which deposit schedule applies to their business by reviewing IRS Publication 51 or IRS Publication 15 respectively.
For any quarter in which the tax is more than $500, FUTA tax deposits must be made by the end of the month following the end of the quarter. Your FUTA tax is paid entirely by you, the employer, and is not deducted from your employees’ wages.
The Electronic Federal Tax Payment System (EFTPS) is required for making federal tax deposits. Visit the website or call 1-800-555-4477 to enroll.
Reporting Employment Taxes
The IRS requires you to file Form W2 each year to report wages, tips, and other compensation paid to your employees. In addition, you must report the taxes you pay. In most cases, income, Social Security, and Medicare taxes are reported each quarter using Forms 940, 941 (for most businesses), and 944. FUTA tax is reported every year using Form 940.
Maintaining Tax Records
For at least four years, you should keep all records associated with your employment taxes, including amounts and dates of all wage and pension payments made to all employees.
How to File Self-Employment Taxes
When any of the following applies to you, the IRS considers you self-employed:
- As a sole proprietor or independent contractor, you are in a trade or business.
- You are a member of a partnership or limited liability company (LLC) that engages in trade or business (limited partners are generally exempt; LLC members may be treated as employees if the business so chooses)
- Otherwise, you are in business for yourself, including a part-time business.
Those who are self-employed and earn $400 or more per year must pay self-employment taxes, which include social security and Medicare taxes in addition to income taxes. You must estimate these taxes and pay them quarterly because your employer doesn’t withhold them from your wages. Use Form 1040-ES for this.
Husband and wife ventures
In the case of a business run exclusively by a couple, there may be some tax advantages. For federal tax purposes, a husband and wife business can avoid being treated as a partnership under the Small Business and Work Opportunity Act of 2007. Both spouses are treated as sole proprietors, and all income, gains, losses, credits, and deductions are split between them according to their respective interests in the venture. Both spouses may receive credit for their own Social Security benefits. It gets complicated, like everything involving tax laws, so consult with your tax advisor to see if you qualify.
Understanding State Business Taxes
Tax obligations for your business don’t end at the federal level. Local and state governments will also be interested in your revenue.
State Income Taxes
Every state in the U.S. has a business or corporate income tax on its books, and your tax obligation depends on your legal structure. Generally, LLCs and sole proprietorships use different tax forms to report personal and business income, while Limited Liability Companies (LLCs) are taxed separately from the owners.
State Employment Taxes
You must also pay state employment taxes in addition to federal employment taxes. Workers’ compensation insurance and unemployment insurance are also required in all states. Temporary disability insurance is also required in the following states or territories:
- New Jersey
- New York
- Rhode Island
- Puerto Rico
The Important Facts About Collecting Sales Taxes
You, as a consumer, are used to paying sales tax whenever you purchase goods from a retailer (unless you live in one of the five states without a general sales tax). The sales tax is collected from the buyer by the seller, who then forwards it to the state.
It’s your responsibility as the seller to collect, report, and pay sales tax on everything you sell to a customer in a state where your business has a physical presence. Essentially, that is the state where your physical building is located, where your employees live or work, or where your inventory is stored.
Each state sets its own sales tax rates and regulations, and they are as different as the weather in Minnesota and California. Local municipalities, such as counties and cities, may impose additional sales taxes. Online, you can find the general sales and use tax rates and regulations for your state by searching the department of revenue or taxation.
Doing the paperwork
Typically, to collect sales tax, you’ll need a license or seller’s permit from your state, which will assign you a unique identification number. Track sales transactions and tax collected, then file a tax return and pay the state. In some cases, filings and payments are made monthly, quarterly, or annually, depending on the number of your sales.
Internet sales: To collect or not to collect?
Another layer of confusion has been added by internet sales. Businesses continue to debate whether they should collect sales tax on products purchased online and shipped to states where they do not have a physical presence. Some states have passed laws requiring the collection of sales tax regardless of physical reality. The federal government is considering legislation that would affect how this works on a national scale. Go online and search for “[YourState] Internet sales tax” to find out more about how this might apply to your business or get tax business training