Fulfilling Your Business Tax Obligations
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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 a temporary or part-time experienced accountant/bookkeeper to set up your tax filings and schedule 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 following 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 website. Most forms and payments can be completed electronically, although you still can 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 owed, 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. You must file the return even if you believe no taxes are due. For example, let’s assume you planned to hire employees and 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 hiring employees. At the end of the quarter, even though you have not hired an employee and no taxes are due, you are still responsible for filing 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 approached by it. It is just as important to have someone 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 the taxes and fees you will need to pay:
Federal
IRS www.irs.gov
Forms 941 and 940—If hiring employees, you must set up an account with the IRS to pay federal withholding, Social Security, and Medicare. In addition to the withholdings from your employees, you must 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, Social Security, and Medicare. Form 940 is filed annually and calculates the company’s federal unemployment tax due.
An outside payroll service can process these forms along with your regular payroll. For a company with fewer than four employees (the typical threshold for large payroll services), some 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, and 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 you are a C Corp, you file and pay taxes separately.
State
Each state has different taxes and filing requirements. Some basic taxes include income tax, sales tax, 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 time.
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 are 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 on purchases when manufacturing your product.
Unemployment Tax—returns usually are paid quarterly. The tax is based on each employee’s earnings with a limit on the number of annual earnings.
Local
City, Local, and Municipal Taxes—vary significantly 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, 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
- Contractors/Construction
- Parking Facility
- Pest Control
- Self Storage
- Tattoo Studio
Go to your local taxing authority website or call your local office to determine the taxes, 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 required.