This month we’re talking about everybody’s favorite topic: taxes and tax obligations. We know, we know…it’s actually not your favorite topic, nonetheless, it’s a very important topic so it’s something we’ve got to address.
If you missed our first two posts this month, make sure you check out our posts on How To Choose The Right Business Entity and Surprising Tax Deductions—both are full of insights you need to know.
This week we’ll be continuing our series by talking about tax obligations business owners need to know about. Now, these obligations vary quite a bit depending on the structure of the business and which state you live and work in, but we’ve got a lot of information here that could help you avoid costly mistakes. You’ll definitely want to pass these tips on to your clients as well!
Ready to get started? Let’s take a look at a few things you need to know about:
Self-employment taxes consist of social security and medicare taxes and are required on net earnings of $400 or more. Rules for self-employment taxes apply regardless of your age or whether you are receiving social security or medicare. If you are self-employed, you may have to file estimated taxes on a quarterly basis.
Employee taxes include workers’ compensation insurance and unemployment insurance taxes. In California, Hawaii, New Jersey, New York, Rhode Island, and Puerto Rico you’re also required to pay tax obligations toward temporary disability insurance.
Sales taxes are imposed by state and local governments. Customers pay the tax and the small business owner is responsible for assessing it, collecting it and passing it on to the appropriate authorities within the prescribed time. Rates and laws do vary from state to state and they can and do change so you’ll want to keep tabs on how sales tax works in your state. Additionally, if you want more information, you might consider reading Sales Tax 101 for Small Business Owners and Online Retailers.
State taxes apply mostly to LLCs. LLC business owners will typically pay state taxes through individual returns. Some states charge an LLC tax on top of the members’ income tax paid. Other states, charge an annual LLC fee, unrelated to income, also known as a franchise tax, registration fee, or renewal fee. For more information, check with a CPA or your state’s employment department before making any tax payments.
LLC taxes are a little more complicated than those assessed by the other entities. That said, we’re going to dig a little deeper now into the requirements for LLC’s and how they differ depending on if you have a single or multi-member LLC.
First, a handful of facts that may apply to an LLC:
- All profits and losses “pass through” the business to each individual member of the LLC
- Profits and losses are reported on personal federal tax returns
- The business does not pay federal income taxes
- Some states do apply an annual tax to LLCs
- Depending on the number of members in the LLC, the IRS may treat the business like a sole proprietorship or partnership
- Some LLCs are classified as corporations by federal tax law and taxed accordingly
In the case of a Single Member LLC, the IRS will treat the business as a sole proprietorship, (unless the business is classified as a corporation). Furthermore, all profits and losses will need to be reported on personal tax returns and filed with the 1040 tax return.
For a Multi-Member LLC, the IRS will treat the business as a partnership (unless it is being taxed as a corporation). In this case, the business doesn’t pay taxes and each owner’s tax obligations are reported on their share of the profits when filing their personal tax returns. Profit sharing is defined in an LLC Operating Agreement. It’s important to note that LLC owners and members are self-employed, which means taxes are not withheld. That being the case each member must pay quarterly estimated taxes and self-employment taxes to avoid hot water later on.
As you can see, tax laws and requirements vary greatly depending on the type of business and the state in which the business operates. For more info and more guided help, contact us today for a consultation.
And be sure to come back next week for our final blog post in this series on taxes where we’ll take a good look at the key tax terms you need to know to win the tax game.
