Small Business Tax Concerns

There is a major contradiction on taxes. Paying you business tax is good; it means you are earning money.  However, you also want to pay as little business tax as possible.  You also need to make it as easy as possible in terms of time, effort and worry.  This can get complicated with all the taxing organizations and complex laws.  This article details some of the requirements and issues to help you meet those requirements with as much ease as possible.

Business Tax Process

The first issue on filing income taxes is the process.

The options are:

• Do it yourself
• Use an online or inexpensive service e.g., TurboTax
• Hire an accountant

In general, the more complicated the return and less familiar you are with taxes, the more likely you should hire an accountant.  In addition, you need to consider the tradeoffs between running the business and preparing a return.  However, if it is a simple return or part of a personal return, then you can do it yourself.

You can often do your own taxes using TurboTax software (www.intuit.com) or some other similar business tax software package.  The overriding principle remains what your time is worth and what you know about taxes.  To give up meaningful marketing to do taxes may not be a good use of work time.  This is a judgment call of a personal nature.  Some who work for themselves do have time between engagements to-do it and perhaps even enjoy it as an intellectual challenge.  Even in these circumstances, you might want to run the results by an accountant.

Ongoing Record Keeping

No matter what, a simple spreadsheet, QuickBooks, Peachtree Software, or some other method maintaining a meticulous track of your income and expenses is key, no matter who does your taxes.  A simple clue:  if you are putting all your records in a brown paper bag or similar orifice, you need to change the process and you need to change it now.  QuickBooks, Quicken, or Peachtree are very user friendly tools and will save a lot of money at your business tax time.  Relying on one of these or similar software tools makes it easier for your tax preparer.  He/she will have all your raw material in neat categories.  Depending on the software the business tax guy uses, he/she may even be able to import your data file directly into his/her tax prep software.

Tax Liability Categories

There are a few major categories of business tax liabilities

• Federal income and employment taxes
• State sales taxes
• State Income and other taxes.

The requirements of each category vary tremendously by type of business, state of operation and nature of the business.  There are numerous computer programs available like QuickBooks, TurboTax, etc., to facilitate the process and make sure you get professional legal and/or accounting advice if there are any complications.

Federal taxes

The form of business you operate determines what taxes you must pay and how you pay them.  The are the four general types of business tax:

• Income Tax
• Self-Employment Tax
• Employment Taxes
• Excise Tax

Income Tax

All businesses, except partnerships, must file an annual income business tax return.  Partnerships file an information return.  The form you use depends on how your business is organized.

The federal income tax is a pay-as-you-go tax.  You must pay the tax as you earn or receive income during the year.  An employee usually has income tax withheld from his or her pay.  If you do not pay your business tax through withholding, or do not pay enough tax, you might have to pay estimated tax.

Estimated tax

Generally, you must pay taxes on income, including self-employment tax (discussed next), by making regular payments of estimated tax during the year.  Typically, payments are made on a quarterly basis.

Self-Employment Tax

Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves.  Your payments of SE tax contribute to your coverage under the social security system.  Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.

Typically, you must pay SE tax and file Schedule SE (Form 1040) if either of the following applies.

• If your net earnings from self-employment were $400 or more.
• If you work for a church or a qualified church-controlled organization (other than as a minister or member of a religious order) that elected an exemption from social security and Medicare taxes, you are subject to SE tax if you receive $108.28 or more in wages from the church or organization.

Note:  there are Special Rules and Exceptions for aliens, fishing crew members, notary public, State or local government employees, foreign government or international organization employees, etc.

Employment Taxes

When you have employees, you as the employer have certain employment business tax responsibilities that you must pay and forms you must file.  Employment taxes include the following:

• Social Security and Medicare taxes
• Federal income tax withholding
• Federal unemployment (FUTA) tax
• State income tax withholding

Excise Tax

There are a variety of excise taxes you may have to become familiar with.  They generally may apply in the following situations:

• Manufacture or sell certain products.
• Operate certain kinds of businesses.
• Use various kinds of equipment, facilities, or products.
• Receive payment for certain services.

Form 720

The federal excise taxes reported consist of several broad categories of taxes, including the following:

• Environmental taxes.
• Communications and air transportation taxes.
• Fuel taxes.
• Tax on the first retail sale of heavy trucks, trailers, and tractors.
• Manufacturer’s taxes on the sale or use of a variety of different articles.

Form 2290

There is a federal excise tax on certain trucks, truck tractors, and buses used on public highways.  The business tax applies to vehicles having a taxable gross weight of 55,000 pounds or more.

Form 730

If you are in the business of accepting wagers or conducting a wagering pool or lottery, you may be liable for the federal excise tax on wagering.

Form 11-C

Occupational Tax and Registration Return for Wagering, to register for any wagering activity and to pay the federal occupational tax on wagering.

Sales Tax Small Business Owners and Online Retailers

Collecting sales tax is one of the most confusing aspects of transacting business – online and off!

Questions about sales taxes are among the most frequently asked on the SBA.gov Community “Filing and Paying Taxes” discussion thread.  Questions abound.  When does sales tax apply?  What transactions are exempt?  What happens if you are selling online or to someone outside your sales tax jurisdiction?

Whether you’re starting a new business or expanding into e-commerce, here’s what you need to know about your sales business tax obligations:

What is sales tax?

Sales tax is a retail point-of-purchase (POP) tax imposed by state and local governments that is paid by the purchaser for goods and services.  As a small business owner, you are required to assess sales tax, collect it and pass it on to the appropriate authorities within a prescribed time.  Sales tax rates and laws vary from state to state – which often leads to confusion, especially if you sell to customers in more than one state.  Currently, Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon don’t impose general sales taxes at the state level.  However, many localities in Alaska have their own local sales taxes.  Make sure to check the rates periodically, as laws change.

What is a sales tax permit and who needs one?

In order to collect sales tax, your state may require you to obtain a sales tax permit.  You can find links to state tax resources from the SBA here.

How do you process money collected as sales tax?

Generally, states require businesses to pay the sales taxes they collect quarterly or monthly.  You’ll have to use a special tax return for sales taxes, and report all sales, taxable sales, exempt sales and amount of tax due.  Not paying on time can result in penalties.  As always, check with your state or local government about the process in your location.

What types of transactions are exempt from sales tax?

While you should check with your individual state government as to which goods and services sold in your state are subject to sales tax (unfortunately, it varies a great deal), generally you are not required to collect sales tax for the following transactions:

• Resold items – Retailers and resellers don’t typically have to pay sales tax on wholesale purchases since it’s assumed that the end consumer will pay sales tax on the items at the final point of purchase.
• Raw materials – If you produce and sell goods that will be the raw material for other goods, these items are typically considered sales tax exempt.
• Non-profits – Sales made to non-profits are exempt from sales tax.

If you are involved in these types of transactions, you’ll need to get a copy of the buyer’s tax-exempt certificate or number (issued by the state).

What if you sell to customers in different states?

This is a complicated gray area of sales tax law.  What happens when your customers are located in other states – a common scenario for e-commerce and online business owners.  Whose rules do you follow?  Should you charge sales tax?

Here’s what you need to know:

• If your business has a physical presence in a state (also known as a “nexus”), whether it’s a store, office, warehouse, employees, or other criteria established by your state, then you MUST collect sales tax from customers in that state.
• If you don’t have a presence in a state, then you are NOT required to collect sales taxes.  (Here again, keep a close eye on laws as this could change over time.)

As mentioned above, each state defines “nexus” differently; however, any bricks and mortar footprint in that state, such as an office or warehouse, will affirm that a nexus exists and thus, sales tax must be collected.

What sales tax rate should you use when selling online or out-of-state?

This is another tricky scenario.  If you’ve determined that your business must add on a sales tax charge for transactions in certain states (and the customer does not have tax exempt status), you’ll need to determine which sales tax rate to charge.

Sound overwhelming?  Yes, it can be.  With thousands of sales tax jurisdictions in the U.S., determining which sales tax rate to charge can be a challenge.  If you operate an online business, it’s worth investing in online shopping cart services to handle sales transactions, many of which will automatically calculate sales tax rates for you.  More comprehensive online sales tax solutions can also take care of the end-to-end process of calculating, collecting and filing sales tax returns on your behalf.

State Income Taxes

In addition to business taxes required by the federal government, you will have to pay some state and local taxes.  Each state and locality has its own tax laws.  Having knowledge of your state tax requirement can help you avoid problems and save your business money.  The most common tax requirements for small business are income taxes and employment taxes.

Income Taxes

Nearly every state levies a business or corporate income tax.  Your tax requirement depends on the legal structure of your business.  For example, if your business is a Limited Liability Company (LLC), the LLC gets taxed separately from the owners, while sole proprietors report their personal and business income taxes using the same form.  Consult the General Tax Information link under your state for specific requirements.

Employment Taxes

In addition to federal employment taxes, business owners with employees are also responsible for paying certain taxes required by the state.  All states require payment of state workers’ compensation insurance and unemployment insurance taxes.  You should also review whether your state also requires a business to pay for temporary disability insurance.

Conclusion

In summary, viewing taxes as a requirement for being in business and being profitable helps defer the complexity and frustration with the process.  If you have the skills there are great tools and government resources to help you.  If not, hire a professional to help you.  In any case, keep your records and be aware of the requirements.