Let’s face it, taxes are complicated, especially if you own a small business. Read below about tax concerns to avoid some of the most common pitfalls experienced by small business owners today.
As your business grows, you will probably need to hire employees. Some of the most common tax concerns involve employee tax issues. When you hire employees, you have to file timely payroll tax returns and make the required tax deposits.
Payroll taxes include three types of taxes:
1. Income Tax.
You must withhold the proper amount of income tax from each employee’s paycheck throughout the year.
2. Social Security and Medicare Tax or FICA.
You must withhold the employee’s share of FICA taxes from each paycheck and you must match that amount.
3. Federal Unemployment Tax or FUTA.
This tax goes to the unemployment insurance system and is paid by the employer. The employee pays no part of FUTA.
Always pay your payroll taxes in full and on time. If you don’t, the IRS adds interest and large penalties. The interest and penalties can quickly grow if you don’t pay them immediately. These fees can be enormous and can cause businesses to fail if they cannot afford to pay the fees.
Another common tax issue is mis-classifying workers. Workers are usually classified as either regular employees or independent contractors. Business owners have payroll tax withholding and reporting obligations for all of their employees; however, business owners don’t have to withhold or make contributions for payroll taxes for true independent contractors.
Calling someone an independent contractor saves a lot of time complying with IRS reporting requirements. It also saves money-you don’t have to make the employer’s share of the FICA contributions and you won’t have to pay unemployment compensation. It costs a business 20 percent to 40 percent more per worker to treat them as employees. While it may be tempting to use independent contractors rather than employees, the IRS is very aware of the benefits of mis-classifying an employee as an independent contractor and will impose stiff penalties for those who break the rule.
If you plan to use independent contractors rather than employees, take the IRS test (http://www.irs.gov/pub/irs-pdf/p1779.pdf), which lists 20 factors to determine whether a worker is an employee or contractor.
Have a Federal Tax Issue? The Neighborhood Christian Legal Clinic – Low Income Taxpayer Clinic can consult with you to provide advice regarding your IRS tax issues, and/or potentially act on your behalf for FREE if you qualify for assistance (come to a clinic intake session)!
Jim Floyd is the Staff Enrolled Agent at the Neighborhood Christian Legal Clinic – Low Income Taxpayer Clinic.
As an Enrolled Agent, Jim is a federally-licensed tax practitioner with unlimited rights to represent clients before the Internal Revenue Service. This means he is unrestricted as to which taxpayers he can represent, what types of tax matters he can handle, and which IRS offices he can represent clients before. Enrolled agent status is the highest credential the IRS awards.
To attain the enrolled agent designation, candidates must demonstrate expertise in taxation, fulfill continuing education credits, and adhere to a stringent code of ethics.