What Are My Five Federal Tax Obligations?
Wednesday

 

Entrepreneurs that are new to filing their taxes as a small business and not as an employee may wonder what it means to determine their federal tax obligations. How many are there? Do the obligations differ depending on your business’ legal structure or are they the same across the board? The answer all lies in your business entity. We’re digging a bit deeper to uncover the five federal tax obligations that small businesses face during tax season.

Income tax

Entities that need to file and pay this tax: LLCs, Corporations, S-Corporations, Sole Proprietorships, and Partnerships (but only for individual partners in a partnership).

Also known as a pay-as-you-go tax, if you receive or earn income throughout the course of the year, its federal income tax must be paid. Former employees typically have this tax withheld from their pay, but it’s not exactly the same situation for entrepreneurs who have to calculate and determine how much they owe on their returns. With the exception of partnerships which file an information return, all businesses are required to file an annual income tax return. Individual partners in a partnership, as mentioned above, will also file an income tax return.

Self-employment tax

Entities that need to file and pay this tax: LLCs, Corporations, S-Corporations, Sole Proprietorships, and Partnerships.

No matter how old you are, you have to pay self-employment tax. As defined by the IRS, SE tax is a social security and Medicare tax for individuals who work for themselves. This tax contributes to your coverage under the social security system — just as it does when you’re employed as an employee and have the tax withheld from your paycheck. If a business earns $400 or more from self-employment, they must pay their SE tax and file Form 1040 with your SSN or ITIN (individual taxpayer identification number) handy.

Estimated tax

Entities that need to file and pay this tax: Corporations, S-Corporations, Sole Proprietorships, and Partnerships.

Another pay-as-you-go tax, anyone with their own business (like a sole proprietor or partner) must make estimated tax payments. These are used to pay for income, self-employment and alternative minimum taxes and payments are required by individuals that expect to owe taxes of $1,000 or more when their return is filed. For Corporations, this amount is shifted to $500.Use Form 1040-ES to determine your estimated tax and make payments on a quarterly basis.

Employment tax

Entities that need to file and pay this tax: LLCs, Corporations, S-Corporations, Sole Proprietorships, and Partnerships.

Does your business have employees? Then you’ll be filing forms for and paying employment tax, also known as withholding tax. These taxes include federal income tax withholding, federal unemployment tax and social security and Medicare taxes. Small business owners must deposit and report employment taxes, send the IRS information regarding their current address if it has changed and make corrections to employment taxes if any errors are found on the forms.

 Excise tax

Entities that need to file and pay this tax: LLCs (separate entity for certain excise taxes), Corporations, S-Corporations, Sole Proprietorships, and Partnerships.

If your small business uses certain kinds of equipment, manufactures or sells certain products or receives payment for a specific service, it will have to file forms for and pay an excise tax. Sounds pretty vague, right? Excise taxes touch on taxes for industries including environmental, fuel, retail sale of heavy trucks and trailers, and air transportation. They are the taxes paid when purchases are made on a specific good and are included in that good’s price. These forms are very specific and range from anything including Form 2290 for excise tax on heavy highway vehicle use to Form 730 for accepting wagers, so be sure to do a bit of research to determine which form is the proper one your business should file.

 

As you might already notice, almost every type of business entity needs to file and pay the taxes for these five federal tax obligations! Take the time to fill out the forms and file in advance, when you can, and make your payments on time to avoid any penalties and keep your small business in compliance.

 

About the Author

DS

Deborah Sweeney is the CEO of MyCorporation.com, which provides online legal filing services for entrepreneurs and businesses, startup bundles that include corporation and LLC formation, registered agent services, DBAs, and trademark and copyright filing services. You can find MyCorporation on Twitter at @MyCorporation and Deborah at @deborahsweeney.