What Small Business Owners Need To Know About Filing And Paying Taxes

While many wage earners only concern themselves with taxes on one day of the year, small business owners often have filing requirements all year round. In addition to income tax returns, you may be required to file and pay payroll taxes, sales and use taxes, excise taxes, and more—on the federal, state, and local levels. It’s a lot to juggle. And while I’m a big proponent of having a team to help with tax matters, you should still be aware of what—and when—to file. Here’s a quick summary of what you need to know.

Employer Identification Number (EIN)

Most businesses will need an Employer Identification Number (EIN) — think of it as your business’s Social Security Number. This number is what you’ll use to open your bank account and file your tax returns.

You typically need a new EIN when starting a business or if you change the structure of your business, such as converting from a partnership to a corporation. You don’t typically need a new EIN if you merely change your business name or address. Additionally, sole proprietors or single-member limited liability companies that file taxes using Schedule C (on a 1040) and don’t have employees or owe excise tax do not need an EIN.

It’s easy to apply for an EIN, and it’s free. Some companies or professionals may charge a fee for obtaining an EIN for you, but this should reflect the time or service provided. The Internal Revenue Service does not charge a fee for an EIN.

The fastest way to get your EIN is online directly through the IRS website.

To apply online, your principal place of business must be located in the U.S. or its territories, and you must be the responsible party with a valid Social Security number (SSN) or Individual Taxpayer Identification Number (ITIN). If you’re a third-party designee, you must have a signed authorization (like Form 2848) to apply.

You can also fax Form SS-4, Application for Employer Identification Number, to 855.641.6935 (for U.S. businesses). If you apply by fax and provide a fax number, the IRS will fax a cover sheet with the EIN back to you in four business days.

If you don’t have access to a fax machine, you can mail Form SS-4 to: Internal Revenue Service, Attn: EIN Operation, Cincinnati, OH 45999. You’ll get your EIN in about 4 weeks.

If you were incorporated outside of the U.S. or U.S. territories, you cannot apply for an EIN online. Call the IRS at 267.941.1099 Monday – Friday, 6 a.m. to 11 p.m. ET (note that this is not a toll-free number) or fax Form SS-4 to 855.215.1627 (within the U.S.) or 304.707.9471 (outside the U.S.).

Regardless of how you submit the application, you can apply for only one EIN per day.

And while I know you’re eager to get started, it’s not a good idea to apply for an EIN until your business is legally formed. If you get your EIN early and have a change during the incorporation or organizational process, you may need to reapply.

Once you have the EIN, you’ll use the number for all business-related correspondence with the IRS. You’ll also want to include your EIN on banking and financial documents to keep reporting requirements consistent. If, for example, you open a business savings account in your personal name using your personal Social Security Number, the bank will issue the 1099-INT in your name. The same applies to loans, investment accounts, and other tax-related activities. Failing to keep those numbers separate can lead to confusion at tax time for both you and the IRS.

Income Taxes

All businesses must file an annual return with the IRS, even if they did not generate a profit. Unlike individuals, there is no exemption for filing.

For federal purposes, sole proprietors and single-member limited liability companies will file a Schedule C with their Form 1040 (as opposed to a separate return). The due date is April 15.

For federal purposes, entities taxed as a partnership, including limited liability companies that have not elected another tax status, will file Form 1065. The due date for partnerships that follow a calendar year is March 15.

For federal purposes, entities that have elected to be taxed as an S corporation will file Form 1120-S. The due date for those S corporations that follow a calendar year is also March 15.

For federal purposes, entities taxed as a C corporation will file Form 1120. The due date for those C corporations that follow a calendar year is April 15.

Estimated Taxes

Depending on your business income for the year, you may need to make estimated payments. This requirement applies not only to individuals but also to corporations. Failing to make sufficient payments throughout the year can result in penalties and interest when tax time arrives, so it’s important to plan ahead. If you don’t need to make estimated payments, you’ll pay when you file your return each year.

Payroll Taxes

When you own a business and pay employees, you are responsible for payroll taxes. The most well-known taxes, Social Security and Medicare, have a fixed rate. For 2015, the employer portion of the Social Security tax is 6.2% with a taxable wage base of $118,500 (wages over that amount are not subject to Social Security tax). The employer portion of the Medicare tax is 1.45%. There is no wage base limit for Medicare tax (in other words, all wages are subject to Medicare tax).

As the employer, you are responsible for paying the employer share (6.2% for Social Security tax and 1.45% for Medicare tax) on behalf of your employees. You must also collect and remit the employee portion by withholding these amounts from your employees’ paychecks. The rates are the same for both employees and employers (6.2% for Social Security tax and 1.45% for Medicare tax). Employers are also required to collect the Additional Medicare Tax of 0.9% on wages exceeding $200,000 for single filers and heads of household (it’s $250,000 for married couples filing jointly and $125,000 for married individuals filing separately)—there is no employer match for this tax.

You may also need to withhold federal income tax from your employees’ wages. To figure that amount, ask your employees to complete Form W-4. You won’t file the employee’s Form W-4 with the IRS, but you do need to hold onto it for your own records.

During each pay cycle, you will collect payroll taxes and deposit them with the IRS according to a schedule. This schedule is determined by the amount of money you collect and is typically monthly. You will also report those deposits to the IRS. This is where things can get a little confusing. It’s not uncommon for your reporting frequency to differ from your deposit frequency. For instance, your business may be required to deposit payroll taxes on a monthly basis but report those deposits on a quarterly basis. Pay close attention to the due dates for both.

Failing to report and remit payroll taxes can result in serious consequences. For example, a trust fund recovery penalty may apply. The penalty is 100% of the unpaid trust fund tax and may be imposed on those the IRS deems responsible for collecting or paying the tax. That means that the liability becomes personal (as opposed to a business liability) and isn’t easily discharged. Even more serious? Those employers and responsible persons who fail to pay over trust fund taxes may be subject to criminal charges. Sentences can result in restitution and jail time.

You can’t outrun the liabilities either: Unpaid payroll tax liabilities typically do not disappear. If you close down your business or move away, those liabilities stay with you.

Federal Unemployment Taxes

Your business may also be responsible for paying Federal Unemployment (FUTA) Tax if you paid wages of $1,500 or more in any quarter during the year or if you had one or more employees for at least some part of a day in 20 or more different weeks during the year. The rate of tax for FUTA is 6% on the first $7,000 you pay to your employees during the year. You may be able to offset that amount with unemployment taxes you paid to a state. This isn’t considered a proper “payroll tax” since this tax is only paid by employers, not employees.

Self-Employment Taxes

If you are a sole proprietor or have no employees, you are responsible for the Self-Employment tax (SE).

In a typical employer-employee relationship, the employer pays a portion of Social Security and Medicare taxes, and the employee pays a corresponding portion. When you work for yourself, there’s no employer to pay the employer portion, so you have to pick up both sides of the cost through the SE tax.

Generally, you must pay SE tax if your net earnings from self-employment were $400 or more. Special rules may apply to those who work for churches, government employees, and others (check with your tax professional if you’re not sure whether special rules apply to you).

Excise Taxes

Excise taxes may also apply if you perform certain kinds of services or manufacture and sell certain goods. This generally includes “sin taxes” (such as those on alcohol and tobacco) as well as fuel taxes, air transportation taxes, and other taxes.

State and Local Taxes

While I’m generally focusing on federal taxes, be aware that state and local tax obligations may also apply to small businesses. In addition to income and payroll taxes, many state and local authorities impose sales and use taxes. Just five states (Alaska, Delaware, Montana, New Hampshire, and Oregon) don’t have a state sales tax.

Sales tax is a tax on the exchange, sale, or transfer of goods and services—exactly how much tax is owed and on which products is determined by state or local law. Sales taxes are typically added to the sales price at the register or checkout and are paid by the consumer—this is also true for online sales. The business that collects the tax is responsible for filing the appropriate tax returns and remitting the tax to the appropriate taxing authority.

Help Is Available

Not only can managing your tax picture take up a lot of time, but the complexity can sometimes feel overwhelming. A good tax professional can assist you with preparing, filing, and paying your taxes.

I highly recommend small businesses find a reliable payroll company. While larger companies may have in-house resources to handle payroll accurately, small businesses often do not. A dependable payroll company will collaborate with you to ensure that your employees are paid on time and that the correct amount of taxes is withheld and remitted, including federal, state, and local taxes. A good payroll company will also ensure that the proper amounts are withheld for other pre-tax benefits, such as health insurance and retirement plans.

Typically, payroll companies charge a flat fee plus a per-employee fee. The amount depends on the complexity of payroll, including whether the payroll company also administers benefits.

Even when you use a payroll company, remember that your business is still on the line with the IRS and other tax officials. Opt for a reputable company and ensure it’s bonded and insured. Once you find one you like, pick up the phone and schedule a meeting to discuss your options. You don’t have to wait until December to get started—with today’s software, there’s generally a quick turnaround to get started (no more waiting until the beginning of the year).

If all of this seems rather intimidating, it is. That’s why I recommend working with a team to keep your taxes straight. And if you’re already behind on your taxes? Don’t despair. It’s fixable. Take a deep breath and contact a good tax attorney.