Businesses and Taxes

According to the Small Business Administration’s Office of Advocacy, 99.9% of all the businesses in the United States are small businesses, translating into a total of 31.7 million businesses spread throughout the nation. There are 60.6 million small business employees which translates into a total of 47.1% of all employees working throughout the nation. Businesses drive the economy of the United States since they both supply labor and customers, goods, services, payments and revenues. Small businesses generate 44 percent of the economic activity in the United States.

There are several types of businesses, each with its own set of advantages and disadvantages. However, no matter how the business is organized, it must still pay business income taxes according to its type. Tax monies allow the government to pay for the infrastructure, defense and social programs for the people living in the United States. Both people and businesses benefit from the government spending tax monies.

Now, some businesses pay their taxes directly to the Internal Revenue Service (IRS) in the form of regular deposits. These monies are withheld from the employees’ paychecks of the business and are later deposited with the IRS. There is another type of business structure that pays taxes differently. These are partnerships and can include sole proprietorships, S corporations and Limited Liability Companies (LLCs).

Partnerships instead file an annual information return since each partner reports profits and losses on their own individual tax returns. This is referred to as a “pass through” business, which is the dominant business structure in America. They are not subject to corporate taxes. Profits earned are “passed through” the business and reported on the business owners’ personal income taxes. This eliminates the two layers of taxes that corporations pay: one at the corporate level and one at the shareholder level. These businesses also pay self-employment taxes and state and local taxes. 

Payroll taxes comprise most of the taxes that businesses pay. Payroll taxes include Federal income tax, Social Security and Medicare tax, Additional Medicare tax, Federal unemployment tax (FUTA), excise tax and self-employment tax (SE), if applicable. The Federal income tax is paid as it is earned since employers withhold the appropriate amount from their employees’ paychecks. They then hold these monies in trust to be paid to the IRS at designated times. Most businesses use a Federal Tax ID Number or Employer Identification Number (EIN) for the identification and tracking of such tax reports to the Internal Revenue Service (IRS).

It is absolutely necessary that employers pay these Trust Fund taxes to the IRS on time. Utilizing collected tax monies for purposes other than paying these taxes is illegal. This act will result in not only all the tax monies to be paid to the IRS, but penalties and interest as well. Furthermore, a Trust Fund Recovery Penalty (TFRP) can be assessed against you personally. Personal assets of the employers and/or persons responsible for collecting and depositing the tax monies with the IRS can be seized to pay these back taxes. Liens and levies can also be utilized by the IRS to ensure payment.

If you receive a letter from the IRS regarding back payroll taxes or a tax lien on your business, DO NOT ignore it. Instead, contact us immediately so that we can assist you with payroll tax resolution options. Tax resolution help is our specialty. We can also help with payroll tax as a service so that you can avoid the hassle. Payroll taxes will be further discussed in future blogs.

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