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December 15, 2017 | Posted in:

Tips to Navigate the Complex Small Business Tax Maze

Small business owners face a continual headache dealing with government mandates for a jumble of federal, state and local taxes. Complying means endless paperwork, ongoing deadlines and ever-looming threats of audits and penalties. Skimping on employer related taxes is also one of the most common penalties faced by employers, and they can get steep very quickly. Here are some of the most common twists and turns in the small business tax maze.

 

Employee requirements

Employers must withhold federal income tax from employees’ wages based on their W-4s and the applicable withholding tables provided in the Employer’s Tax Guide on the IRS website. You must also withhold Social Security (FICA) and Medicare taxes from each employee’s wages and pay matching amounts out of pocket.

An additional 0.9% Medicare tax must be withheld for any individual’s wages in excess of $200,000 for the calendar year.

Finally, you must pay Federal Unemployment Tax (FUTA) for your employees, entirely from your own funds.

FICA and Medicare taxes (employer and employee portions), as well as federal income tax withheld, must be deposited either monthly or semi-weekly, depending on the amounts involved. FUTA deposits are required for each quarter wherein the cumulative tax exceeds $500.

 

“It is extremely important that all taxes withheld from employees be paid in to the government in a timely fashion,” instructs Associate Partner Julie Strohlein, CPA.  “The withholdings represent the employees’ money.  Willful failure to collect or pay the tax can invoke the Trust Fund Recovery Penalty, which is 100% of the unpaid tax.  This means a taxpayer would owe double the amount withheld.”

 

To report federal income tax withheld, Social Security and Medicare taxes, most businesses must file Form 941, Employer’s Quarterly Federal Tax Return. FUTA is reported annually on Form 940, Employer’s Annual Federal Unemployment Tax Return. You also must complete Form W-2, Wage and Tax Statement, annually for each employee and transmit copies (with Form W-3, Transmittal of Wage and Tax Statements) to the Social Security Administration. Additional copies must be provided for state and local tax departments and each employee.

 

Self-employment

Sole proprietors, general partners, independent contractors and others who work for themselves must report self-employment tax to cover their Social Security and Medicare. They must also make quarterly estimated tax deposits to cover their expected self-employment and individual income tax liabilities.

 

State and local

As if the federal requirements weren’t enough, each state also has individual requirements for reporting and paying taxes. These may include state income tax due and withheld, state disability insurance, state unemployment insurance and sales tax. Local governments such as counties and cities can often levy their own taxes (including property, business license and gross receipts), which have separate reporting and payment requirements.

 

“Many withholding taxes are only assessed up to a certain threshold,” says Julie.  “This means an employer must keep track of each employee’s year-to-date wages and know when to stop withholding a tax or when to stop paying the employer’s share of a particular tax.”

 

Make managing your taxes easier

To keep track of your obligations, create a calendar that maps out each tax-related deadline that applies to your particular business. It’s also worth writing out simplified procedures for submitting required reports, computing taxes and making payments.

 

Given the complexity of small business taxes, the best bet is to get the guidance of a professional to help you with the computing and reporting process.

 

“Many companies opt to use a payroll company to process payroll and manage the payroll tax filings,” observes Julie.  “The sheer volume of rules, thresholds, and number of taxing authorities involved makes payroll a good candidate for outsourcing.  Paying the processing fees can be much less costly than running afoul of all the tax requirements.”

 

Learn more about our payroll affiliate, Abacus Payroll Inc. →

 

“If you are thinking of starting a new business, Alloy Silverstein can advise you on the best type of entity to form and operate,” points out Associate Partner Mike Engleman, CPA. “There are various choices, such as corporations, s-corporations, partnerships, and LLCs.”

 

Clarity is possible when it comes to business tax requirements. An Alloy Silverstein accountant and advisor is here to help your small business. Contact us today for a review of your tax calendar and procedures, or if you have any questions.

 

The information contained in this newsletter is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information or for assistance with any of your tax or business concerns, contact our office at 856.667.4100.

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