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Starting a Business and Keeping Records

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Business Taxes

The form of business you operate determines what taxes you must pay and how you pay them. The following are the four general kinds of business taxes.

  1. Income tax.
  2. Self-employment tax.
  3. Employment taxes.
  4. Excise taxes.

Tip. You may want to get Publication 509. It has tax calendars that tell you when to file returns and make tax payments.

Income Tax

All businesses except partnerships must file an annual income tax return. Partnerships file an information return. Which form you use depends on how your business is organized.

The federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year. An employee usually has income tax withheld from his or her pay. If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax. If you are not required to make estimated tax payments, you may pay any tax due when you file your return.

Estimated tax. Generally, you must pay taxes on income, including self-employment tax (discussed next), by making regular payments of estimated tax during the year.

Estimated Taxes (Income and Self-Employment)
Period Covered: Due:
January 1 to March 31April 15
April 1 to May 31June 15
June 1 to August 31September 15
September 1 to December 31January 15 of following year

Sole proprietors, partners, and S corporation shareholders. You generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return. Use Form 1040-ES, Estimated Tax for Individuals, to figure and pay your estimated tax. For more information, see Publication 505, Tax Withholding and Estimated Tax.

Corporations. You generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more when you file its return. Use Form 1120-W, Estimated Tax for Corporations, to figure the estimated tax. You must deposit the payments as explained on page 8 under Depositing Taxes. For more information, see Publication 542.

Self-Employment Tax

Self-employment tax is a social security and Medicare tax primarily for individuals who work for themselves. Your payments of self-employment tax contribute to your coverage under the social security system. Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.

You must pay self-employment tax if either of the following applies.

  1. Your net earnings from self-employment (excluding church employee income) were $400 or more.
  2. You had church employee income of $108.28 or more.

Use Schedule SE (Form 1040) to figure your self-employment tax. For more information, see Publication 533, Self-Employment Tax.

Tip. You can deduct one-half of your self-employment tax as an adjustment to income on your Form 1040.

The Social Security Administration (SSA) time limit for posting self-employment income. Generally, the SSA will give you credit only for self-employment income reported on a tax return filed within 3 years, 3 months, and 15 days after the tax year you earned the income. If you file your tax return or report a change in your self-employment income after this time limit, the SSA may change its records, but only to remove or reduce the amount. The SSA will not change its records to increase your self-employment income.

Employment Taxes

This section briefly discusses the employment taxes you must pay, the forms you must file to report them, and other forms that must be filed when you have employees.

Employment taxes include the following:

  1. Federal income tax withholding.
  2. Social security and Medicare taxes.
  3. Federal unemployment (FUTA) tax.

If you have employees, you will need to get Publication 15, Circular E, and Employer’s Tax Guide. If you have agricultural employees, get Publication 51, Circular A, and Agricultural Employer's Tax Guide. These publications explain your tax responsibilities as an employer.

If you are not sure whether the people working for you are your employees, see Publication 15-A, Employer's Supplemental Tax Guide. That publication has information to help you determine whether an individual is an employee or an independent contractor. If you classify an employee as an independent contractor, you can be held liable for employment taxes for that worker plus a penalty. An independent contractor is someone who is self-employed. You do not generally have to withhold or pay any taxes on payments to an independent contractor.

Federal Income, Social Security, and Medicare Taxes

You generally must withhold federal income tax from your employee's wages. To figure how much federal income tax to withhold from each wage payment, use the employee's Form W-4 (discussed later under Hiring Employees) and the methods described in Publication 15.

Social security and Medicare taxes pay for benefits that workers and their families receive under the Federal Insurance Contributions Act (FICA). Social security tax pays for benefits under the old age, survivors, and disability insurance part of FICA. Medicare tax pays for benefits under the hospital insurance part. You withhold part of these taxes from your employee's wages and you pay a matching amount yourself. To find out how much social security and Medicare tax to withhold and to pay, see Publication 15.

Which form do I file? Report these taxes on Form 941, Employer's Quarterly Federal Tax Return. (Farm employers use Form 943, Employer's Annual Tax Return for Agricultural Employees.)

Federal Unemployment (FUTA) Tax

The federal unemployment tax is part of the federal and state program under the Federal Unemployment Tax Act (FUTA) that pays unemployment compensation to workers who lose their jobs. You report and pay FUTA tax separately from social security and Medicare taxes and withheld income tax. You pay FUTA tax only from your own funds. Employees do not pay this tax or have it withheld from their pay.

Which form do I file? Report federal unemployment tax on Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return. Or, if you qualify, you can use the simpler Form 940-EZ instead. See Publication 15 to find out if you can use this form.

Tax laws are subject to change at any time. Please contact us for the latest information.

Please Note: This information is provided to you by Accounting and Tax Center, Inc., for use as general guidance, and is not rendering specific legal, tax, or accounting advice. Only a qualified tax professional with all the facts at his or her disposal can determine the appropriateness of the application of any law to a given set of facts.

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