Thursday, January 30th, 2020
Every business, no matter how small, has several tax obligations that it must meet. This includes taxes at the federal, state, and sometimes local level along with payroll taxes. At BMH Accounting, we understand that keeping track of so many obligations can be challenging. However, doing so is essential to avoid fines and possibly other sanctions from the Internal Revenue Service (IRS) and your state or local governments.
In terms of withholding from employee paychecks, you must deduct federal tax, state tax if applicable, social security, and Medicare. Below we outline how to determine your tax obligation at both the federal and state levels. Before you arrange to pay any taxes, however, you must first choose your tax year.
How to Choose the Tax Year Most Appropriate for Your Business
Choosing a tax year to coincide with the 12-month calendar year is the most common among business owners. This typically works well for companies without special accounting situations that would require the business owner to choose another alternative. If your accounting cycle doesn’t end on December 31, using a fiscal year instead of a calendar year will work better for you. If you have a special situation such as operating your business only part of the year due to starting or stopping it, you should select a short tax year for your filing status.
The type of structure you choose for your business determines the categories of taxes you pay and how much you pay for them. You may be subject to one or more of the following types of federal taxes:
- Employer tax: This covers specific payments you must make such as contributing to the workers’ compensation and federal unemployment programs.
- Estimated tax: As a self-employed business owner, you must make estimated quarterly tax payments to the IRS.
- Excise tax: The IRS only charges this on specific services or goods such as alcohol and tobacco.
- Income tax: This is the amount of federal tax withheld from employee paychecks based on their income and number of exemptions.
- Self-employment tax: People who employ themselves are subject to the full amount of social security and Medicare, currently 12.4 and 2.9 percent.
Each state creates and enforces its own rules regarding employment taxes. If your state collects these taxes, the types and amounts you pay will depend on your business structure and physical location. If you’re a sole proprietor, for example, you will pay state taxes via estimated payments and include your income and expenses on your personal tax form. Corporations, on the other hand, pay taxes as a separate entity from the people who own the business.
Get Help with Proactive Tax Planning and Meeting Your Tax Obligation
BMH Accounting is available now to assist your small business with strategy to reduce your tax burden and gain a better understanding of the tax obligations you face. Please contact us today to request your initial consultation.Tags: accounting, business taxes, small business, small business accounting, tax obligations