Setting up and paying business taxes:

This is an area where many small business startups get into a lot of trouble.   There are many different types of taxes which a business, especially in New York City, are required to file and to pay. They include: New York State publishes a good NYS tax guide for new businesses.   The IRS has an online calendar to give you an idea when forms and payments are due.

If all of this seems incredibly complicated and daunting, then you get it.   Most accountants will be happy to work with you to set you up for these payments, completing all forms or making the payments for you.   In addition you can find services or software that will help you with most of your tax forms.   Intuit's QuickBooks with payroll service, for example, will calculate all of the necessary employment taxes and forms for you and will remind you when it's time to make payments and file forms.

After you've done this for a while, you will truly understand why a good accountant can be a business owner's best friend!

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Employment Taxes

Federal Employment Tax Payments

Review the IRS Guide to Employment taxes for any questions you have regarding federal payroll taxes.   Today, most forms can be filled out and submited online and most payments must be made online.   When reviewing the following steps for setting up and paying your federal employment taxes, keep in mind that the time to make payments is often different from the time to file the corresponding form.   You may have to pay your witholding tax every pay period whereas you only have to file your witholding forms quarterly.  

The following are steps for setting up your federal employment taxes and filing the appropriate forms.   Your particular business may have special requriements so always check with your accountant:
  1. Whether you plan on having employees or not you should get an Employee Identification Number (EIN).   The EIN is like a Social Security Number for your business.   If you are a sole proprietorship you could use your social security number if you do not have employees, but it is better to get an EIN anyway.   You can get your EIN online for free at onine application for EIN number.   Using the online application, you can get the EIN number immediately.   You can also use the IRS fillable SS4 Form to apply by mail.   It will take several weeks to get your EIN number by mail.
  2. Have every employee complete a W4 form.   Witholding taxes will be based on the choices made by the employee on the W4.   The W4 form does not have to be filed with the IRS but does have to be kept by you even after the employee no longer works for your business.
  3. Computing the witholding taxes:   Compare the costs and ease of use of all of the below options.
    • You can compute the witholding taxes yourself using the IRS Tax tables.   These figures will change based on the gross income paid each pay period.   If an employee's dependants, hours, salary, tips or other items change in any pay period the witholding has to be recalulated.   There can also be periodic changes to these tables during the year.   It can take quite a long time to do this using the tax tables.   The following options will save you a great deal of time and possibly penalties.
    • If you have an Accountant for your business (and you should), you can have the accountant compute all of the witholding for you.   Typically, you or someone from your business with call the accountant a day or two before payday and the accountant will prepare the paystubs for you.   If you are using your accountant to prepare your witholding tax filings (940), they extra cost of doing the paystubs may be minimal.   Get an estimate from your accountant.
    • There are many payroll services available including from companies like ADP and even your business banks.   You typicall call the service or enter the information online and it will calcluate the proper witholding for you.
    • You can find many accounting software programs which also provide payrool services.   QuickBooks with payroll service, for example, will calculate all of the necessary employment taxes and forms, print the paychecks with paystubs, complete the filing forms for you and will remind you when it's time to make payments and file forms.
  4. Making Payments:  
    • Starting in 2011 all federal payroll taxes must be made using the Electronic Federal Tax Payment System (EFTPS).   You will need your EIN number to open an account with EFTPS.   Set up this account several weeks before you will start paying witholding taxes.   For security reasons, it can take several weeks for your account to be active.   Also make sure to keep your username and password in at least 2 safe places.   EFTPS makes it much easier for you to pay necessary taxes and lets you look at your history of payments.
    • When you must deposit your witholding taxes will depend on the amount of your tax liability.   Most new businesses start out having to pay witholding monthly.   Starting with each new year, the amount on you 941 form from the prior year will determine if you are a monthly or semi-weekly payor.   If your total taxes for the prior year were $50,000.00 or more, you will become a semi-weekly depositor.   For more information, consult the IRS Employer's Tax Guide.
    • Deposit deadlines are absolute!   If you do not make the deposit on or before the due date, you WILL be assessed a penalty and the penalties can be quite large.   Whenever you get a penalty form, it will give you instructions for appealing the penalty.   If you have a good reason, the IRS may waive the penalty but they will look at your history.
  5. Filing Federal Income Tax Forms:   The options for completeting and filing the below forms are similiar to the options for computing witholding tax.   Most of these forms can be filed online using the Modernized e-file (MEF) system.
    • 941 Quartery PayrollTax Return. If your totaly witholding taxes for all employees will be less than $1,000.00 for the year, you can use the IRS 944 form.
    • 940 Annual Federal Unemployment Tax (FUTA).
    • W2 forms must be completed (in 6 parts) and sent to the employee by the end of January and the Social Security Administration by the end of February.
    • The W3 form must be completed sent to the Social Security Administration by the end of February.   You can use the Social Security website to help file out and file the the W2 and W3 forms.
    • For anyone that is not a corporation that you pay $600.00 or more you must complete a 1099 form for each, send it to the person and to the IRS at the end of the year.

New York State and City Tax Payments

  1. Once you hire your first employee you must register for New York State Unemployement Insurance.   You will need your EIN in order to register.   Once registered you will receive your Employer Registration Number (ERN).   You can use the Online Unemployment Insurance registration or call (888) 899-8810 or (518) 457-4179.
  2. Each new employee you hire must be reported to the NYS Tax Department within 20 days of the day they start work.   This can be done with the New hire online reporting, or by mailing or faxing a copy of the new employee's W4 form to:

    PO BOX 15119
    ALBANY, NY 12212-5119

    or by faxing it to (518) 869-3318
  3. Computing witholding Taxes:   You should compare all of the options for computing witholding discussed above.   If you wish to compute the witholding yourself, use the current tax tables.
  4. Making Payments:   Similiar to the EFTPS service for Federal tax payments, you can set up an online account for Businesses to make your witholding and unemployement insurance payments.
    • You must pay your State and City witholding tax and unemployement insurance with your quarterly NYS-45 form if your total witholding is less than $700.00 for the quarter.   Anytime your witholding reaches or exceeds $700.00 during a quarter, you must pay it immediately with a NYS-1 form.
    • If your business is located in NYC, once your payroll goes over $2,500.00 you must pay the Metropolitan Commuter Transportation Mobility Tax (MCTMT) of .34% for all covered employees.   In addition, each owner or partner of the business will be required to pay the tax on their own income if it exceeds $10,000.00 a year.   The tax can be paid using the online services.   MCTMT forms are available in fillable pdf including estimated payments.
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Sales Taxes

If your business will sell products or specific services, you cannot operate until you have received a "Certificate of Authority" to collect sales tax.   The rules for collecting, filing and paying sales taxes as well as record keeping are some of the most important rules for a business owner to know and follow.   They are explained in NYS's A guide to Sales Tax in New York State in detail.   Most forms and payments can be made online on the NYS online Sales and Use tax website. Top of Page

Business Income Taxes

Estimated Taxes:

The first thing to get used to with business income taxes is filing estimated returns.   Unless you pay yourself a salary as part of a corporation, there will usually not be any witholding taxes.   Unless you set aside and pay your estimated taxes regularly you can end up with a big tax payment (and penalties) due and no money to pay it.

Whether you take a draw from a sole proprietorship, partnership of Sub Chapter S Corporation you must make quarterly estimated tax payments if your taxes will equal or exceed $1,000.00 .   This is the only way you will know how much you are really making and the only way to avoid spending money which you must pay later.   Just because there's money in the cash register, it doesn't mean that it's yours to spend. or have income which you leave in your business.

Self-Employment Tax:

Self-Employment taxes are the Social Security and Medicare taxes which would normally be deducted from your salary if you were not self employed PLUS the employer contributions for these taxes.   In other words, as your own employer you will pay double the amount of these taxes.   Normally, these taxes would be computed on the first $106,800.00 of your income as follows: For 2011 the employee witholding of social security has been reduced by 2% (but not the employer portion). &nbsb; Therefore, for 2011, Self-Employement taxes will be computed on the first $106,800.00 of your income as follows: Self-Employment taxes are calculated and reported on Schedule SE on your tax return.   You can deduct one half of your Self-Employment Taxes from your adjusted gross income.

Sole Proprietor:

As a sole proprietor you file a Schedule Co report your profit or loss.   The Schedule C is part of your individual 1040 Tax return.   Any amounts owed over and above estimate you already paid are paid when you file this return.

Sole Proprietorships doing business in NYC are also subject to the Unincorporated Business Tax (UBT).

Partnership Returns:

At the end of the year partnships are required to file Form 1065 - Return of Partnership.   It is referred to as an "information return" because the partnership does not pay income tax with the return.   Instead, each partner received a "K-1" as part of the 1065 and uses the K-1 to report his/her income from the partnership on their individual tax return.   Any amounts owed over and above estimate you already paid are paid when you file your 1040 individual tax return.

Sole Proprietorships doing business in NYC are also subject to the Unincorporated Business Tax (UBT).

Corporation Returns:

Sub-Chapter S Corporation:

If you started your business as a corporation you can choose to had it treated the same as a partnership or sole proprietorship for income tax purposes.   You keep the limited liability that a corporation provides and get the tax advantages of a partnership or proprietorship.   Deciding on whether to elect to be a Sub-Chapter S corporation can require a thorough analysis of many factors.   You should always consult with your accountant and lawyer before deciding what is best for you.

Sub-Chapter C Corporation:

If you did not choose to have your corporation treated as a Subchapter S corporation, it will be treated as a Sub-Capter C Corporation.   As a C Corp. the shareholders can receive regular paychecks with witholding deducted.   Profit which is not distributed to the shareholders will generally be subject to a Corporate Tax and later taxed to individual shareholders as a dividend when profits are disbursed.   You should always consult with your accountant and lawyer before deciding what is best for you.
  • A C Corporation files a Form 1120s return.   Corporate taxes above estimates already paid are paid with this return.
  • Each shareholder must report any dividends received from the corporation on their 1040 return.  
  • The C Corporation pays estimated taxes using Form 1120-W.
  • Excise Taxes:

    Depending on your business purchases and/or activities, you may be subject to special Federal excise taxes or NYS or NYC excise taxes.   Check the above links to see if you are subject to these excise taxes.