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The type of business will determine the type of taxes that will be required to be remitted. Here is a list of considerations.
You know this tax — it gives the government a share of your net income. Generally, all businesses must file an annual income tax return. The forms that the business will be required to file will depend on how the business is organized. Businesses organized as C Corporations generally will pay the income tax at the entity level. However, businesses organized as pass-through entities (such as S Corporations and Partnerships), generally, pass through the income tax liability to the individual shareholders.
For employers with employees, the company must withhold and pay certain taxes on behalf of its employees. The following types of payroll taxes may be required: Social Security and Medicare taxes, federal and state income tax, and federal unemployment tax.
The Federal Insurance Contributions Act regulates the collection of Social Security and Medicare taxes. Employers must withhold Social Security tax and Medicare tax. There is a salary ceiling above which no more Social Security is collected, and it is typically adjusted every year. There is no limit on the number of wages subject to the 1.45 percent Medicare tax.
Income tax withholding is based on the withholding conditions the employee states on his or her W-4 form, the employee’s taxable wages, and the taxing authorities’ withholding table that matches the employee’s situation.
Payroll taxes and withholdings are held in trust by the business until the business makes the required tax deposits. Failure to collect, truthfully account for, and pay these taxes can result in large penalties and is not dischargeable in bankruptcy. The fines and penalties can be up to a $10,000 fine or five years in prison, or both.
If a business manufactures or sells certain goods the company may have to pay federal or state excise taxes. These are basically extra taxes for the use or consumption of certain products. Some manufacturers or resellers include these “duties” in the price of the product (such as with cigarettes and gasoline). Businesses pay excise taxes on such things as ozone-depleting chemicals and fuel, and purchases of trucks, trailers, and semitrailers, and sport fishing equipment, for example.
You should first know that individuals who work for themselves and have net earnings of $400 or more pay self-employment tax. This tax consists of two parts: Social Security taxes and Medicare taxes. As of 2021, the self-employment tax rate was 15.3 percent (12.4 percent for Social Security and 2.9 percent for Medicare).
Self-employment tax is calculated using Schedule SE (Form 1040), and you can deduct the employer-equivalent portion when calculating your adjusted gross income. Depending on your income, you may be required to pay estimated taxes quarterly rather than one lump sum annually.
Federal Income Tax
Employers are required to withhold federal income tax from employees’ wages, tips, and earnings using Form W-4 and Publication 15, Employer’s Tax Guide, to determine the amount. You will then deposit the withholdings on either a monthly or semiweekly schedule.
Social Security and Medicare Taxes
Social Security and Medicare taxes are determined, withheld, and deposited the same way as federal income tax. However, unlike with federal income tax, you will “match” these withholdings in accordance with the Federal Insurance Contributions Act (FICA).
Additional Medicare Tax
Starting in 2013, the IRS implemented an Additional Medicare Tax of 0.9 percent. For any income that exceeds a given employee’s designated threshold, you must begin withholding Additional Medicare Tax, starting with the pay period in which the marker has been surpassed. Thresholds are determined by the employee’s filing status. For example, if an employee files single, any income in excess of $200,000 for the tax year triggers Additional Medicare Tax. For an employee who is married and filing jointly, the threshold is $250,000.
Federal Unemployment Tax Act
The Federal Unemployment Tax Act (FUTA) requires employers to pay FUTA tax with their own funds; this tax is not withheld from employees’ pay. You will deposit your FUTA tax at the end of the month following the quarter in which it exceeds $500.
Now it’s time to start applying these concepts to real-world numbers so there are no surprises; give me a call today and I’ll gladly assist you with depositing, reporting, and filing your business taxes.
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Business taxes can get complicated quickly, so be sure to keep in close touch with us to make sure you’re in full compliance.