For those who are operating a small business, there are a variety of potential taxes that you, as the business owner, may be responsible for. For the purpose of this article, we will focus on federal tax obligations. Here are the four federal taxes with which you will need to be familiar.
Federal tax needs to be paid on any income that the business nets. Business income is defined as money received from the sale of tangible services or products. The way to account and report income tax is based on how you have organized your business.
Normally a business is structured as a sole proprietorship, a partnership or as any of the different types of a corporation. A sole proprietorship is unincorporated; it is a business owned by an individual with no separate existence apart from the owner/operator.
As a self-employed sole proprietor, if you have net business income of $400 or more, you are required to file a tax return. Your net profit (or loss) is reported to the IRS on a Schedule C, associated with your personal 1040. If you are coupled as part of a partnership, the business income tax is paid via Form 1065. Corporations use the Form 1120 series.
Self-employment tax consists of Social Security and Medicare taxes only. This tax is primarily paid by individuals who work for themselves.
This tax must be paid in two respects – in relation to your personal business income, as well as the required portion paid for any employees you may have. See Payroll Tax below.
Self-employment tax kicks in at the same $400 threshold. If you are a sole-proprietor using Schedule C to report your small business earnings, then figure your self-employment tax using Schedule SE and file this schedule along with your 1040.
The IRS does allow you to deduct half of what you pay in self-employment tax when determining your personal adjusted gross income, or the amount of income you will be taxed on after you figure your exemptions, credits and other deductions.
Payroll / Employment Tax
This tax is specific to any employees you may be carrying. If you are allowed to compensate your workers as non-employees, then you are not responsible to withhold or deposit any tax for them. See the related article on the IRS web site, Independent Contractor (Self-Employed) or Employee?.
Payroll tax includes two things:
1. Any federal income tax the employee has elected to have withheld from their pay each pay period. You would be aware of this election because you should have instructed your employee to complete a Form W-4.
2. Your share of the employee’s Social Security and Medicare taxes (FICA tax). You are responsible to pay half of this total tax.
For information on withholding and depositing payroll taxes, see IRS Publication 15, Employer’s Tax Guide.
This tax is also specific to any employees you have. In addition to payroll taxes, you are responsible to pay into the Federal Unemployment fund. It does not matter if any of your employees have, or ever will, draw on unemployment.
FUTA tax is something paid from your own business funds only. It is not something that you can pass on to your employees or have withheld from your employees paycheck. Use Form 940 to report and pay FUTA tax.
There are a few other miscellaneous taxes to consider as well. If you are operating a transportation or a construction company, you may need to pay fuel tax or a heavy vehicle use tax. If you are selling business equipment or property, you may be required to pay capital gains taxes.
For more information, visit the IRS Small Business and Self-Employed Tax Center.