Frequently Asked Questions: Small Business Taxes
Q. What is and what isn't a tax deductible business expense?
A. Just about any "ordinary, necessary, and reasonable" expense that helps you earn business income is deductible. What's ordinary and necessary? The IRS has defined this as anything that's "helpful and appropriate" for your business. For example, buying a computer, or even a sound system, for your office or store can be an ordinary and necessary business expense. Buying the same items for your family room cannot be a business expense, however.
Q. Is it safe and sensible for me to keep my own books and file my own tax returns?
A. To make sure you're on the right track, it's a good idea to have your bookkeeping system managed by a savvy, small business tax professional. With just a few hours of work, he or she should help you avoid the most common and costly mistakes.
Q. Do I have to get a Tax ID?
A. Every new business needs its own tax ID number. To get a federal tax ID number, you must fill out IRS Form SS-4 (available from the IRS Web site at www.irs.gov--click on "Forms and Publications"), and either mail or fax it to the IRS office indicated in the Instructions to Form SS-4. There is no fee. Once the IRS issues you a number, you will have to get a tax ID number from each state in which you have a business address. This will involve filling out a state form (which will look suspiciously like the SS-4) and paying a small filing fee.
Q. What are my payroll and tax responsibilities as an Employer?
A. Reporting and depositing payroll taxes to the appropriate agency in an accurate and timely manner is your
responsibility as an employer and vital to your business. Late or inaccurate deposits may result in penalties and interest charges. These complex payroll tax requirements may seem intimidating but by learning a few simple concepts, you will be able to understand your payroll responsibilities and choose the best method for meeting them.
Q. What are payroll taxes?
A. Any tax levied by a government agency on employees' wages, tips, and other compensation. The amounts withheld by employers from employees' pay for federal income, social security, and Medicare taxes are considered as trust fund taxes. They are referred to as trust fund taxes because the money is held in a special trust fund for the U.S. government. Amounts withheld for state and local income taxes are held in trust for the state or local government.
Q. When are federal and state employment tax filings due?
A. Every company and individual is required to submit at least an annual report to the government but what must be completed is determined by the company's activities. The reports due and the time they are due at the state level vary from state to state.
Q. What federal and state tax employment tax filings will I have to file?
A. The federal and state tax filings will vary according to your organizational type, your activities, and your location. Some filings you may need to complete are:
- Quarterly state unemployment compensation tax
- Annual federal unemployment tax form (Form 940)
- Quarterly employer tax filing (Form 941)
- Quarterly and annual state employment taxes
- Quarterly and annual city/county tax filings employment taxes