An Entrepreneur’s Guide to Tax Obligations

When it comes to tax laws, it’s every business leader’s goal to protect his or her company from possible over or under payment, and of course, to avoid fines. Since tax obligations vary from one state to the next, a certain amount of research is required in order to gain a proper idea of what is expected of you.

Any entrepreneur will agree that learning the essentials of business tax implications is often one of the most tedious and challenging aspects of starting a new business. Each organization has its own set of unique necessities, and tax laws that never affected your company early on, may actually end up significantly influencing your company’s finances down the road. In other cases, you may find your business remains completely unaffected by certain regulations. Therefore, understanding the changeable obligations of your own company’s tax requirements is crucial. Simply stated, there is no “one size fits all” in the world of business tax laws.

Tax Laws - word cloud

 

In fact, your tax obligations can be affected by everything from the nature of your company to the status of your employees. The basic configuration of your business can even change where you stand tax-wise, which is why it’s recommended that all aspects of your company are considered from the very beginning.

Also, if you are presuming that your tax responsibilities will automatically begin as soon as your profits get underway, you will likely be greatly mistaken. In effect, you may even find that making such conjectures could cost you more than you think, including some unanticipated legal woes.

Even when entrusting an accountant or financial professional to handle anything tax-related, it’s still important to have your own insight into the effects of the tax system on your business. This becomes crucial not just when verifying that you are being properly paid, but for the simple fact that it is one of your fundamental duties as a business owner.

To assure you are in the know regarding your own tax obligations, the following is a basic synopsis of some of the chief tax issues you may face now as well as down the road.

Obtaining Your Federal Tax ID

It’s best to begin by finding out if you will need an Employer Identification Number (EIN). Also referred to as a Federal Employer Identification Number (FEIN) or a Federal Tax Identification Number (FTIN), the EIN is similar to a social security number in that it is a unique nine-digit number. The IRS provides a business with an EIN for purposes of business identification in relation to tax.

Any company who has hired employees is required to obtain an EIN; this also applies to partnerships and corporations. Self-employed sole proprietors, however, are exempt from obtaining an EIN since they are permitted to use their personal social security numbers instead.

How Payroll Taxes Affect Your Company

Companies with a paid staff must ensure accuracy when calculating the specific tax rates for each of their workers. Funds are to be withheld from each paycheck, and employees provided with a clear listing of the amount of capital being directed toward federal, local, and state taxes. These taxes are time sensitive, and an inability to pay the correct amounts by the designated date can result in burdensome fines for your organization.

Payroll tax withholdings can cover several items, one being income tax and the Federal Insurance Contributions Act (FICA). However, an employee must earn enough wages for this withholding to be individually relevant to them. Remaining payroll taxes vary by state, so business owners must do their own research to find out their status when it comes to state income tax laws.

Moreover, if you own an incorporated business without employees, remember that your own paychecks are still subject to the same income tax laws as companies with a paid working staff. The reason for this is that the IRS views you as an employed member of your own company.

Calculating Your Estimated Taxes

Business owners who have not hired a staff — or incorporated their company — must classify themselves as self-employed. In this instance, instead of figuring your income and FICA taxes on a monthly basis, you must estimate your tax withholdings on a quarterly schedule; and pay this amount directly to your specific state treasury as well as the IRS. Comparable to the withholding method of filing income taxes, the failure to properly calculate and pay taxes on a timely basis will also leave your company paying significant fines.

The estimated tax system is utilized most by the self-employed (whether as a partner or on an individual basis) who are forecasting an annual income tax payment of less than $1,000 within one fiscal year. Even though estimated taxes are paid on a monthly basis, it is recommended that independent entrepreneurs set aside funds each month for this specific purpose. This is important to maintain a smooth budget with few cash flow predicaments.

Determining Your Sales Taxes Eligibility

Companies that provide a good or service to their clientele are also subject to sales tax. However, the amount of funds withheld as well as what needs to be covered is affected and dependent upon local government and state tax laws. This signifies that you may not need to pay a sales tax on specific products or services; therefore, once again, it’s crucial that you check the regulations within the location that your business operates.

Nevertheless, it’s important for business owners to remember that when it comes to payable product-based sales tax, no deductions can be filed. These types of taxes are also identified as “gross receipt taxes” since they represent a direct percentage of the total amount of received gross receipts.

In the past, businesses that strictly provided a service, with no tangible product, were exempt from paying a sales tax; however, most parts of the U.S. now require that companies pay sales tax on services as well. In either case, it’s still highly recommended that business owners look into whether or not they are permitted to pass the tax along to their customers. Be sure to confirm your sales tax requisites with your state’s individual revenue and taxation department.

Tax Laws - receipt_calculator_ledger

 

Informational Resources

Also, remember to make use of the IRS website for further resources, as seen below:

IRS Tax Information for Businesses

IRS State Government Tax Laws

Obtaining Tax Identification Numbers

 

Fred Coon, CEO

At SC&C we offer Career Analysis to help senior decision-makers from all walks of life identify strategies and tactics to increase their value-add employment potential.