Small-business owners wear many hats. They are experts in their fields and handle human resources, information technology and even tax issues, and taxes often end up being neglected until the last minute.
But the smaller the business, the less attention the IRS pays to it, right? Wrong. Small businesses with assets under $10 million are a focus for IRS audits. For this reason alone, it is important for small business owners to keep good records. This will also ensure business owners get the tax breaks they are entitled to have.
Here's how small-business owners can stay on top of their tax situations:
Four types of employment taxes to know
Small-business owners have an obligation to withhold federal income tax, and may also be required to withhold state and local income taxes from their employees' wages, just as larger entities are required to do so. The federal taxes that must be withheld from employees’ wages are federal income tax, Social Security tax and Medicare tax. Employers withhold the employee portion of Social Security tax and Medicare tax liabilities from their employees' wages and pay the other half. For most tax years, the employee and employer portions of Social Security and Medicare taxes are equal and each is responsible for paying one half. However for 2011 and 2012, the employee portion of the Social Security tax is reduced by 2%. The federal unemployment tax, which funds the compensation workers who lose their jobs receive, is paid completely by employers.
Accurate, timely bookkeeping can save headaches down the road, and this includes depositing taxes when they are due. Small businesses must deposit the federal income tax withholding along with the employer and employee portions of Social Security and Medicare taxes. This can be done electronically or by mailing or delivering a payment with Form 8109 to an authorized financial institution. Electronic deposits can be made using the Electronic Federal Tax Payment System, which is a free, 24/7 system provided by the U.S. Department of the Treasury. Payments using this method can be made online or via phone.
Form W-2 reports the wages, tips and other compensation paid to an employee, as well as the withheld income tax, Social Security tax, and Medicare tax. W-2 forms must be filed with the Social Security Administration by these dates:
- Paper forms – the last day of February
- Electronic forms – April 1st
This article is for informational purposes only. For information regarding your specific tax situation contact a tax and financial professional.
Kimberly Polangco is an H&R Block tax professional in San Diego. You can reach her by calling 619-435-3735.