So, you have decided to start your own business. Great! Congratulations! According to the Small Business Administration, there are 31.7 million small businesses in the United States, representing 99.9% of the total businesses here. Small businesses power the economy. Whether your business reflects one of your hobbies that has developed into a passion or you have finally decided that it is better to work for yourself, there is a lot of work ahead of you when you start your own business.
Most entrepreneurs think of inventory, office equipment and supplies, technology and rental space when starting their business. Many business owners neglect another important part of owning and operating a business: the collection of and payment of taxes to the Internal Revenue Service (IRS), and state and local governments, which include business licenses. Whether you work for yourself and are the only employee of your business or you hire other employees as direct hires or contractors, taxes must be collected and paid accordingly.
Employers must withhold taxes from their employees’ paychecks. These taxes are commonly referred to as “payroll taxes”. Employers collect the taxes throughout the year and deposit them with the IRS and other governmental agencies at designated times of the year. Furthermore, they must provide their employees with a W-2 form (Wage and Tax Statement) at the end of the year. Payroll taxes include: Federal Income Tax, Social Security and Medicare Tax, Additional Medicare Tax, Federal Unemployment Tax (FUTA) and Self-Employment Tax (if applicable).
The calculation of these taxes is fairly straightforward. The Federal Income Tax is calculated using tax tables provided by the IRS. The monies collected for this tax is used by the government to pay for services that benefit the entire nation, such as the building and maintenance of the infrastructure, governmental services, military and other services that the United States government provides its citizens.
Employers must also withhold part of the Social Security and Medicare taxes from the employees’ wages and then pay an additional matching amount. These funds provide monies and medical services to retirees. Since 2013, employers have been exclusively responsible for withholding 0.9% Additional Medicare Tax on each of their employees’ wages and compensation that exceeds a threshold amount according to the employee’s filing status.
Employers also report and pay the Federal Unemployment Tax (FUTA). Since employees do not pay this tax or have it withheld from their pay, the employers must pay the entire FUTA tax from their own funds. Employees who become unemployed can withdraw from this fund according to the amount they paid into the fund.
For those who are self-employed with net earnings of $400 or more or for those who work for a church or a qualified church-controlled organization, there is a self-employment tax. This Self-Employment Tax covers Social Security and Medicare benefits for the self-employed. These payments contribute to the individual’s coverage under the social security system, which provides the individual with retirement benefits, survivor benefits, disability benefits and hospital insurance (Medicare) benefits.
The collection and payment of taxes may be overwhelming to the newly-initiated business owner; however, it will become easier the more often it is done. Besides, there is always help available from a tax professional, such as Bullseye Tax Relief. Contact us today for any assistance.
Coming blogs will explain the consequences of not collecting, filing and depositing these tax monies with the proper tax authorities in a timely manner.