Tax obligations can be a lot to keep track of as a small business owner. Nevertheless, the Internal Revenue Service (IRS) and your state government expect you to know which tax obligations you need to meet and to meet them on time. Below are several tax considerations every small business owner should be aware of according to the IRS.
What Tax Year Should You Choose?
The IRS requires every business to keep accurate accounting records and pay taxes according to the appropriate tax year. For most small businesses, choosing a tax year that coincides with the calendar year works best. Although business owners can change their tax year, it requires permission from the IRS. Choosing wisely from the start can help you avoid this common problem.
The calendar tax year is most appropriate if you don’t anticipate unique accounting needs for your business. However, you should choose a fiscal tax year if your company operates a 12-month accounting cycle that you prefer not to end in December. The short cycle tax year is another possible exception. You would choose this if you didn’t operate your business the entire year or decided to change your accounting period at some point during the year.
Taxes You Must Withhold as a Small Business Owner
The IRS requires you to withhold federal tax, social security tax, and Medicare from the paycheck of every regular full-time and part-time employee. The amount you withhold depends on how much the employee earns along with the information he or she provided regarding exemptions. You must also contribute towards the federal unemployment tax.
Another important thing to know regarding tax obligations is that the business structure you choose has a big impact on what, how much, and how often you pay. For example, you will pay self-employment tax and make estimated quarterly federal and state tax payments if you employ yourself or work as an independent contractor. Additionally, businesses with employees must typically pay state employment taxes that include temporary disability insurance, state unemployment insurance, and workers’ compensation insurance.
A Special Word About Social Security and Medicare
To meet tax obligations for social security and Medicare, employers pay 6.2 percent and 1.45 percent respectively for each person on payroll. Employees pay the same amount as a payroll deduction. Once the employee reaches a salary of $132,900, the IRS no longer requires employers to withhold social security tax. Together, the employee and employer portions of social security and Medicare equal 15.3 percent. Self-employed people must pay that full amount although the IRS allows a deduction for up to half of the amount.
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