So you’ve recently started your business, filed for an EIN (Employer Identification Number), perhaps you’ve even opened your business bank account, now what? If you’re like many new entrepreneurs of today who have transitioned from working a traditional job, you may be feeling a little lost.
You might be asking yourself questions like:
• Am I responsible for paying quarterly taxes?
• What is the amount I should send to the IRS every quarter?
• What about FICA, Medicare, and State taxes?
• If I hire help, am I supposed to withhold taxes from their payroll?
Answers to these questions and many more can be quite confusing to a new business owner. As a tax professional who has been helping people and small business owners for the past 20 years, I cannot tell you how many times I have encountered these types of questions and my clients were quite relieved to have me as their tax partner to educate them about their new tax responsibilities. I am hoping that after you read this article, you will feel that this information helped you to prevent possible problems that may arise down the road.
Once you file for an EIN, the IRS now recognizes your business and they expect you to be compliant and file appropriate tax returns. But what are the appropriate tax returns might you ask? That all depends on what type of business you started.
• If you started a sole proprietorship, or LLC, you file a Schedule C along with your Federal form 1040.
• If you started a Partnership, you file Federal form 1065 for the business and you 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 information from the K-1 gets transferred into your Federal form 1040.
• If you started a C-Corporation, you business files Federal form 1120 and you still file your Federal form 1040 for your personal return.
• If you are an employer and hire employees to work for you, or even if you own a Corporation and employee yourself, you are required to file Employer’s Quarterly Tax Returns and Employer’s Annual Tax Return. As an employer, you are also required to issue a W-2 to your employees. If you’re working with independent contractors and you pay them $600 or more for the year, you are expected to issue them a 1099-MISC.
• If your business is required to collect sales taxes against the sales you make, you are required to file Quarterly Sales Tax Returns. (Check with your State to see if you’re supposed to collect sales taxes on the services or products you are selling.)
If you are operating as an employer, there is some very important information you must remember. Previously, because you were working for someone else as a traditional employee, that business was responsible for withholding and submitting 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 every new business is required to file and pay quarterly taxes to the IRS. Quarterly estimated taxes are owed against profits of the business. The key word here is ‘profit.’ Often times, after you complete your annual tax return (see above) and have legally claimed your business tax deductions and claimed any tax credits you are entitled to, you may end up with a loss and therefore Federal or State taxes will be due. In a case like this, you would not be penalized for having NOT paid your estimated taxes and may even end up with a refund being owed to you. It can sometimes be hard to foresee this outcome so many small business owners play it safe and pay their quarterly taxes anyway.
Some business owners will ask how much should they pay? I usually suggest roughly 25% of their gross revenue earned for the previous three months. This way, when you do file your annual tax returns, if you do owe a balance, because you have been paying something every quarter, it will help you having to pay a large amount all at one time.. The same type of approach can be applied to your State taxes. You can arrange to pay your resident State every quarter. You should check with your respective State to determine what your State tax % is. FICA and Medicare are paid when you file your annual tax return.
That’s the next topic I want to briefly discuss — employees of the business — including you. Many times I have come across small business owners who were operating as employers and were not aware that they were required to file Quarterly Employer Tax Returns and pay any employer taxes owed on wages paid. One time a client who owned a beauty salon that was incorporated even asked me “you mean, I have to file Quarterly Employer Tax Returns and a Business Tax Return for the corporation, and my personal tax return?” My reply… YES!! She was so confused and could not understand why she was required to file all of these different types of returns because she was only one person.
So keep in mind that regardless of which business return you are required to file as determined by your business structure, you are still responsible for filing an individual 1040.