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By cpa | March 28, 2008
When you have your own corporation, you are responsible for many other tax obligations. Many new entrepreneurs are overwhelming with many complex and burdensome bookkeeping and tax obligations.
When you are an employee, you do not have to worry much about taxes. Almost all of your taxes are withheld from paychecks by your employers. But now you are obligated to be in compliance with all of the tax requirements.
Federal, state and local government impose taxes. Federal government has employment taxes, and income taxes. State government has employment taxes, income taxes, sales tax and other local taxes. This article will provide you an overview of the different taxes may apply to you. However, you should contact your state and local tax department for other applicable tax in your state or city.
Employment Taxes: When you need to hire people to help you, you need to be concerned about obeying employment tax law.
The tax laws you have to follow when you hire helpers differ depending upon whether your helpers qualify as employees or as independent contractors by the government agencies.
If you hire an employee to help you in your business, you become subject to a wide array of tax requirement. You must withhold taxes from your employee’s pay, and you must pay Social Security, Medicare taxes and other taxes for them. You have to know that whenever you hire an employee, you become an unpaid tax collector for the government. You are required to withhold and pay both federal and state taxes for your employees. You must pay these taxes periodically (yearly, quarterly, monthly, or semi-monthly) by making tax deposits.
The IRS imposes employment taxes on both employer and employees. Employers and employees are each required to pay 6.2% Social Security on the first $97,500 of an employee’s annual wages. The ceiling for the Social Security tax and 1.45% Medicare taxes on all wages. However, there is no such limit on the Medicare tax: Both you and the employee must pay the 1.45% Medicare tax on any wages.
When you own your corporation and you work as an employee for your corporation, you are subject to both employer and employee’s portion – 15.3% up to $97,500. Now you are the boss as well as the worker.
If you hire an independent contractor, you need not comply with these requirements. All you have to do is report the mount you pay to the independent contractor by filed all required Form 1099.
You may think it is up to you to determine whether any person you hire is an employee or an independent contractor. However, your decision about the classification is subject to review by various government agencies, including: IRS, state tax department, unemployment compensation insurance agency and worker’s compensation insurance agency. In general, if you have the right to control the way a worker does his work and the details of when, where, and how the work is done, and the worker is your employee. Since this is one of the major audit area. We will have a separate article for details.
Income Taxes: You must file federal annual income tax for your corporation. This involves figuring out and calculating all your deductible expenses for the year and subtracting them from your gross income to determine your taxable income. Most states charge a percentage of the income shown on your federal income tax return. You also have to file an annual state income tax return. All states except Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming impose income taxes. New Hampshire and Tennessee impose income taxes on dividend and interest income only. Some cities and counties also impose their own income taxes or annual business registration fees. For example, New York City imposes its own income taxes.
Sales Taxes:
Almost all states and many cities impose sales taxes of some kind. The only states without sales tax are Alaska, Delaware, Montana, New Hampshire, and Oregon. In general, sales taxes impose on sales of goods or products. If you only provide services to clients or customers, you probably are not subject to sales taxes. Most states either do not tax services at all or tax only certain specified services. However, you need to check with your state authorities. For example, Hawaii, New Mexico and South Dakota impose sales taxes on services.
One common misconception is many people think that only corporation is subject to sales tax or employment tax. This is incorrect. Whether you are subject to employment tax or sales tax is not because of your form of business. Corporation or individual Schedule C filers are subject to the same rules when it comes to employment tax and sales tax.
Topics: Businesses |
Comments
April 1st, 2008 at 4:54 pm
Most of people want to be the owner of their businesses because they say they get independent but do you really know all the responsibility it takes?
After all if you are a good employee you will be a good employer.
Thanks.
April 6th, 2008 at 12:54 am
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