So you recently started your business, applied for an EIN (Employer Identification Number), maybe you’ve even opened your business bank account, now what? If you are like many new entrepreneurs today who have left a traditional job, you may be feeling a bit lost.
You may be asking yourself questions like:
• Am I responsible for paying quarterly taxes?
• What is the amount I must send to the IRS each quarter?
• What about FICA, Medicare, and state taxes?
• If I hire help, am I supposed to withhold taxes from your payroll?
The answers to these questions and many more can be quite confusing for a new business owner. As a tax professional who has been helping individuals and small business owners for the past 20 years, I cannot tell you how many times I have come across these types of questions and my clients were quite relieved to have me as their tax partner to educate them on your new tax responsibilities. I hope that after reading this article, you feel that this information helped you prevent potential problems that may arise in the future.
Once you apply for an EIN, the IRS now recognizes your business and expects you to meet the requirements and file the appropriate tax returns. But what are the proper tax returns, you might ask? All of that depends on the type of business you have started.
• If you started a sole proprietorship or LLC, file a Schedule C along with your federal 1040 form.
• If you started a partnership, you file federal form 1065 for the business and still file your federal form 1040 for your personal return.
• If you started an S Corporation, your business files federal form 1120-S along with a Schedule K-1 and the information from the K-1 is transferred to your federal form 1040.
• If you started a C-Corporation, your business files Federal Form 1120 and still submits your Federal Form 1040 for your personal return.
• If you are an employer and you hire employees to work for you, or even if you own a corporation and are an employee, you must file the Employer’s Quarterly Tax Returns and the Employer’s Annual Tax Return. As an employer, you must also issue a W-2 to your employees. If you work with independent contractors and pay them $ 600 or more during the year, you are expected to issue them a 1099-MISC.
• If your business must collect sales tax against the sales it makes, you must file quarterly sales tax returns. (Check with your state to see if you are supposed to collect sales tax on the services or products you sell.)
If you operate as an employer, there is very important information to remember. Previously, because you worked for someone else as a traditional employee, that company was responsible for withholding and filing your federal income taxes, state and local income taxes, FICA, and Medicare taxes. Being your own boss now, you are responsible for paying those taxes. In most cases, the best way to handle paying any federal or state taxes you may owe is to file quarterly estimated taxes.
Unfortunately, what many entrepreneurs don’t know is that not all startups are required to file and pay quarterly taxes to the IRS. Quarterly estimated taxes are due on business profits. The keyword here is “profit”. Often after completing your annual tax return (see above) and legally claiming your business tax deductions and claiming the tax credits you are entitled to, you can end up with a loss and therefore have to pay federal taxes. or state. In a case like this, you would not be penalized for NOT paying your estimated taxes and could even end up with a refund. Sometimes it can be difficult to predict this outcome, which is why many small business owners take a chance and pay their quarterly taxes anyway.
Some business owners will ask how much they should pay. Generally, I suggest about 25% of your gross income earned during the previous three months. This way, when you file your annual tax returns, if you owe a balance, because you have been paying something every quarter, it will help you pay a large amount at one time. The same kind of approach can be applied to state taxes. You can arrange to pay your state of residence each quarter. You should check with your respective state to determine what your state tax percentage is. FICA and Medicare are paid when you file your annual tax return.
That is the next topic I want to discuss briefly: the employees of the company, including you. Many times I have come across small business owners who operated as employers and did not know that they were required to file quarterly employer tax returns and pay the employer taxes they owed on wages paid. One time, a customer who owned a beauty salon who got on board even asked me “you mean, do I have to file quarterly employer tax returns and a business tax return for the corporation, and my personal tax return? ” My answer … YES !! I was so confused and couldn’t understand why I had to submit all these different types of statements because I was just one person.
So keep in mind that regardless of the business return you are required to file as determined by your business structure, you are still responsible for filing an individual 1040 form.