As discussed in an earlier blog, there are five business structures recognized by the Internal Revenue Service (IRS) (Business Structures | Internal Revenue Service (irs.gov)). Partnerships and Limited Liability Companies have been previously discussed. Sole Proprietorships (Sole Proprietorships | Internal Revenue Service (irs.gov)) will be discussed in this blog.
A sole proprietor is an individual who owns a business. A sole proprietor reports his or her income on individual income tax returns, such as IRS Form 1040. The individual reports profits and losses from this business on IRS Form Schedule C. Schedule SE for reporting self-employment may also be used.
The federal income tax is a “pay-as-you-go” tax. As you receive or earn income, you pay the appropriate income tax throughout the year. Employees have taxes withheld from each paycheck. Individuals may have to pay estimated taxes if they do not have income tax withheld or if they do not have enough income taxes withheld. Self-employment tax (SE tax) is paid by individuals who work for themselves. These payments contribute to their coverage under the social security system, which pays their social security and Medicare. Social security coverage provides the individual with retirement benefits, survivor benefits, disability benefits, and hospital insurance benefits or Medicare. Since this process can be complex and complicated, it is best to seek help with payroll tax from a tax professional.
There are two criteria for paying SE tax and filing the required Schedule SE (IRS Form 1040 or 1040-R):
- If net earnings for self-employment was $400 or more
- If wages of $108.28 or more are received while working for a church or a qualified church-controlled organization (other than as a minister or member of a religious order) that elected an exemption from social security and Medicare taxes
Please note that there are special rules or exemptions for fishing crew members, aliens, notary public, state or local government employees, foreign government or international organization employees, among others. If you qualify for any of these exemptions, seek consultation with a tax professional for help with employment tax.
If you have employees, no matter what business structure, you are required to pay certain taxes and file certain forms. Employment taxes include:
- Federal income tax withholding
- Social security and Medicare taxes
- Federal unemployment tax (FUTA)
As a business, you must deposit federal income tax withheld from your employees to the Internal Revenue Service (IRS) before the deadline. You must also deposit with the IRS both portions of the employer and employee social security and Medicare taxes collected for that timeframe. This must also be deposited on time. Finally, all taxes deposited, wages, tips, and any other compensations paid to an employee(s), must also be reported to the IRS. Businesses as well as self-employed taxpayers can use electronic filing options for many of the forms and taxes small businesses are required to file, including employment taxes and information returns. A federal tax identification number or Employer Identification Number (EIN) is used to identify tax reports to the IRS.
Collecting, filing and depositing employment taxes can be very complicated. An error can be very costly to fix. Why not hire a tax professional to process these tasks so that you can focus on growing your business? We at Bullseye Tax Relief are here to help. Our next blog will focus on corporations.