Tax Obligations You Need To Know About

obligationsThis month we’re talking about every small business owner’s favorite topic: taxes and tax obligations! We know, we know…it’s actually not your favorite topic, nonetheless, it’s a very important topic so it’s something we’ve got to address.

If you missed our first two posts this month, make sure you check out our posts on How To Choose The Right Business Entity and Surprising Tax Deductions—both are full of insights you need to know.

This week we’ll be continuing our series by talking about your tax obligations as a business owner. Now, these obligations vary quite a bit depending on the structure of your business and which state you live and work in, but let’s take a good look at what you may be responsible for:

Self-employment taxes consist of social security and medicare taxes and are required on net earnings of $400 or more. Rules for self-employment taxes apply regardless of your age or whether you are receiving social security or medicare. If you are self-employed, you may have to file estimated taxes on a quarterly basis

Employee taxes include workers’ compensation insurance and unemployment insurance taxes. In California, Hawaii, New Jersey, New York, Rhode Island, and Puerto Rico you’re also required to pay taxes toward temporary disability insurance.

Sales taxes are imposed by state and local governments. Customers pay the tax and you, as the small business owner, are responsible for assessing it, collecting it and passing it on to the appropriate authorities within the prescribed time. Rates and laws do vary from state to state and they can and do change so you’ll want to keep tabs on how sales tax works in your state. Additionally, if you want more information, you might consider reading Sales Tax 101 for Small Business Owners and Online Retailers.

State taxes apply mostly to LLCs.  If you operate an LLC, you’ll typically pay state taxes through your individual returns. Some states charge an LLC tax on top of the members’ income tax paid. Other states, charge an annual LLC fee, unrelated to income, also known as a franchise tax, registration fee, or renewal fee. For more information, check with CPA or your state’s employment department before making any tax payments.

LLC taxes are a little more complicated than those assessed by the other entities. That said, we’re going to dig a little deeper now into the requirements for LLC’s and how they differ depending on if you have a single or multi-member LLC.

First, a handful of facts that may apply to your LLC:

  • All profits and losses “pass through” the business to each individual member of the LLC
  • Profits and losses are reported on personal federal tax returns
  • The business does not pay federal income taxes
  • Some states do apply an annual tax to LLCs
  • Depending on the number of members in your LLC, the IRS may treat your business like a sole proprietorship or partnership
  • Some LLCs are classified as corporations by federal tax law and taxed accordingly

If you have a Single Member LLC, the IRS will treat your business as a sole proprietorship, (unless you classify yourself as a corporation). Furthermore, all profits and losses will need to be reported on personal tax returns and filed with your 1040 tax return.

If you have a Multi-Member LLC, the IRS will treat your business as a partnership (unless you elect to be taxed as a corporation). In this case, the business doesn’t pay taxes and each owners tax obligations are on their share of the profits when filing their personal tax returns.  Profit sharing is defined in your LLC Operating Agreement. It’s important to note that LLC owners and members are self-employed, which means taxes are not withheld. That being the case each member must pay quarterly estimated taxes and self-employment taxes to avoid hot water later on.

As you can see, tax laws and requirements vary greatly depending on the type of business you own and the state in which you operate. For more info and more guided help, contact us today for a consultation.

And be sure to come back next week for our final blog post in this series on taxes where we’ll take a good look at the key tax terms you need to know to win the tax game.

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