Home Business Start-up: Tax Payment Issues

As a business owner, you also need to be aware of the types of taxes that you have to pay.

You do not have to pay all the taxes discussed in this article because the other taxes varies depending on how you operate your business such as whether you are selling products, hiring employees, or operating as a corporation or sole proprietorship.

But the one common tax that every business has to file and pay is the estimated payments to the IRS. You should always consult your tax accountant to ensure that you cover all your tax bases especially if you are just starting out.

Most Common Tax Payment Issues When Operating A Business

  • Quarterly Estimated Tax Payments
  • Self-employment tax
  • Sales Tax
  • Payroll Tax

Quarterly Estimated Tax Payments

When you run a business, you may need to pay estimated taxes to the IRS.  In general, you may have to pay estimated taxes if you expect to owe $1,000 ($500 for corporation) or more when you file your tax return. You may be charged a penalty if you do not pay enough through withholding or estimated tax payments. Estimated tax are due and must be paid either on a monthly or quarterly basis. If you do not pay enough by the due date of each payment period you may be charged a penalty even if you are due a refund when you file your tax return.

Self-Employment Taxes

As an independent contractor or self-employed individuals, one of the things that you have to worry about is the payment of self-employment tax. Self-employment tax consist of two parts: social security (old-age, survivors, and disability insurance) and Medicare (hospital insurance) taxes. The total rate is 15.3%, where 12.4% is for Social security and 2.9% is for the Medicare.

As you may have noticed, when you work for someone else, you only pay half  of these taxes, while the other half is covered by your employer. As a self-employed individual, you are responsible for both. The good thing about this is that one half of your self-employment tax is tax deductible and is treated as an adjustment to your gross income (above-the-line deduction).

However, you will only pay the self-employment tax if you are filing using form Schedule C with your 1040 individual tax return: meaning your form of business is a sole proprietorship, partnership, single member LLC or LLC with multiple members but elected to file as partnership. The self-employment tax are reported using form SE. If you own a business but it is incorporated, you may be working as an employee, thus, payment of social security and medicare taxes will be made through payroll tax withholdings. Please note that corporate earnings are taxed at corporate rates and dividend distribution to yourself are not subject to self-employment tax.

Sales Taxes

This one only applies if you are selling a product. Not all states impose sales taxes but there are a lot that do. In general, a sales tax must be charged if a transaction occurred in the a state where sales taxes are imposed (meaning both the seller and buyer conducted their transaction in the same state where sales taxes are collected). As an example, if your operating your business in California and a consumer visited your store and purchase something, the customer need to pay the sales tax whether she is a resident of California or a state that does not charge a sales tax (like Oregon). Of course, there are a lot of exception to this rule such as purchasing a car in any state or purchasing products online.

For those who collected sales taxes, the business must file a sales tax return and turn over the money to the state. It is best to consult your tax accountant on how these sales tax work especially if your business operate in a state where sales tax are imposed.

Payroll taxes

When you hire employees, you are responsible for paying payroll taxes. Payroll taxes include the state and federal income taxes, social security tax, Medicare tax, and state and federal unemployment taxes (SUTA and FUTA ). As an employer, you are required to withhold and pay taxes on behalf of your employees.

In general, you are required to withhold 6.2%  for social security benefits and 1.45% for the Medicare benefits of your employee’s earnings for up to $106,800 in 2010. In addition, you are required to pay a matching tax contribution (employer’s portion) towards your employees social security and Medicare taxes for a total of 12.4% for social security and 2.9% for Medicare. For 2011, the income limit is still $106,800 but the employees social contribution has been trimmed down to only 4.2% but the employer contribution is still at 6.2%.

Comments

  1. Your point on estimated taxes reminded me of a similar withholding that I didn’t do (not business and this was state tax) since I wasn’t aware.

    Got a rude shock even though I paid it in full at the end of the year. IRS takes this seriously even if you don’t owe them anything.

  2. Nice reminders. If I ever start making any money at this site, I’ll be digging into this more!