Business Owner's Manual

Federal Taxes

There are numerous resources to help you understand and comply with federal tax laws. The handbooks listed below, available from the IRS Internet site and IRS offices, offer essential information and instructions for new and small businesses, including procedures and tax rates.

• Publication 334: Tax Guide for Small Businesses
  
  
• Publication 583: Taxpayers Starting a Business
  
  
• Circular E (Publication 15): Employers Tax Guide

Additional information is available online or by calling 800-829-1040. Also, the IRS conducts free workshops in Manhattan for small businesses. Call 212-436-1021 for details. In reviewing these materials, there are a number of important issues to keep in mind.

 

Important Issues

Every business with employees (and some sole proprietorships) must obtain a federal Employer Identification Number (EIN) by filing a Form SS4 with the Internal Revenue Service. This number is similar to an individual's social security number and must be used on all income and payroll tax returns and all other legal correspondence. Corporations will need an EIN number to open a bank account.

Employers are required to withhold income taxes, social security and Medicare taxes from wages paid to employees (but not independent contractors — see Employer guidelines) Circular E explains how to calculate the amounts to be withheld and the procedures for payment. It also includes an explanation of the forms that you and/or your employees must complete — Forms W-2, W-3, W-4, 1099 (for independent contractors), and 941.

Employers are also required to pay federal unemployment taxes, but are given a credit for amounts paid to the State. Again, Circular E provides more information.

Important Note: Payroll tax rules are strictly enforced; penalties can be very steep; and owners, partners, and even corporate shareholders are held personally liable for non-payment. The lesson: Be careful and check with your tax advisor. Depending on the number of employees in the business, you may want to consider hiring a payroll service.

The amount and type of taxes you pay on your business income will depend on how your business is structured:

• Partnerships and limited liability companies (see Structuring Your Business) must file "information" returns, but the profits — and losses — of the business are reflected in the individual returns, just like the income from a sole proprietorship.
  
  
• Corporate income is taxed twice, once as corporate profit and once as personal income of the shareholders.
  
  
• S corporations are taxed only once — on the corporation's entire net profit, though a shareholder who works for the corporation must declare himself an employee and pay payroll taxes. Check Publications 334 and 583.