Complete Guide To Small Business Taxes - Part I

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If you own small business chances are compliance with federal tax filing requirements are the last thing on your mind as you strive to keep the business operational and more importantly profitable, so over the next few month’s, I am going to delve into some of the tax filing requirements specific to different types of small businesses. I will also include both Federal income and employment taxes as well. Further, I thought it would be helpful to provide links to the statements available for download on the website.

small business taxes

Sole Proprietorship:

The most simple business form is the sole proprietorship. A sole proprietor is someone who owns an unincorporated business by himself or herself, in other words, the IRS views the business owner and the business as a single entity with a business profit or loss flowing from the Federal Tax Form associated with the business to the tax form of the individual/sole proprietor who owns the business. The relevant forms are as follows:

Income- Sole Proprietors will file form 1040 related to themselves as an individual and schedule C (Form 1040) to report income or loss from a business or profession. The filing requirement is on an annual basis with any tax due to be paid at the time of filing.

Form: 1040, U.S. Individual Income Tax Return, Schedule C (Form 1040), Profit or Loss from Business.

Self-Employment tax- Self Employment tax is a tax placed on the Net Earnings exceeding $400 for the tax period in question. For example, an individual is in business for themselves, at the end of the tax period in question if the total revenues less total expenses amount to net earnings of over $400 the individual will be liable to pay Self- Employment Tax.

Form: Schedule SE (Form 1040), Self-Employment Tax

small business self employment tax

Social Security, Medicare, and Withholding taxes- Federal law requires you, as an employer, to withhold taxes from your employees' pay. Each time you pay wages, you must withhold–or take out of your employees' pay–certain amounts for federal income tax, social security tax, and Medicare tax. Under the withholding system, taxes withheld from your employees are credited to your employees in payment of their tax liabilities. Form 941 is used to report the taxes withheld from wages paid to employees on a quarterly basis even if you have not paid wages to employees during the applicable calendar quarter. Form 944 is used to report the taxes withheld from wages paid to employees if the total amount of tax withheld during the taxable period is less than $1000 dollars. The filing requirement for form 940 is on an annual basis.

Form: 941, Employer's Quarterly Federal Tax Return

Form: 944, Employer's Annual Federal Tax Return

While forms 941 and 940 are used to report the taxes withheld from wages paid to employees on a quarterly and annual basis, forms W-2 and W-3 are filed on an annual basis. The information reported on form W-2 and W-3 should total and reconcile to the total amounts withheld and reported on 941 or 940. Included on the W-2 and W-3 are other items of income and benefits provided by the employer. Some of the other items are certain employee business expense reimbursements, designated Roth contributions made under a section 401(k) plan, and employer contributions to Health Savings Accounts (HSA), just to name a few.

Form: W-2, Wage and Tax Statement W-3, Transmittal of Wage and Tax Statements 

The final form a sole proprietor should be aware of is 1099. The 1099 form is an informational return only. An informational return only provides information to the tax collecting authority, in this case, the IRS and state taxing authorities, but does not compute any tax liability. In the case of a sole proprietor paying independent contractors, the sole proprietor will provide a 1099 MISC to each independent contractor paid over $600 during the calendar year. Further, if the sole proprietor provides services on a contract basis the income received from each contract will need to be reported on a 1099 MISC.

Form: 1099 MISC

Hopefully, with the information provided in this post all you hard working sole proprietors are now better equipped to comply with your tax obligations while still being able to focus on what you do best…growing your business.

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