Federal Taxes for The Small Business Owner

    February 21, 2002

If you are the sole proprietor of a small business, you probably groan at the mention of the phrase “federal taxes.” Unfortunately, the only two certainties in life are death and taxes, so if you’re a small business owner, federal taxes are an unpleasant fact that can’t be avoided. Understanding your responsibilities is the first step toward minimizing your federal tax burden, financially and psychologically. Your tax burden includes taxes based on your net profit, social security taxes, and federal withholding, as well as unemployment taxes.

Federal taxes are a “pay as you go” expense. If you expect to make more than $400 in a given year in self-employment income, you have to file a business tax return. One of the reasons you have to file a business return for such a small amount of self-employment income is to pay your social security taxes. You use Schedule SE and attach it to your Form 1040 to show your social security taxes.

If you hire one or more employees, you also have to pay employment taxes. For employees on salaried or hourly wages, you deposit and withhold federal income tax, your matching share of social security and Medicare taxes from your employees’ wages and federal unemployment taxes. Check out “Publication 15, Circular E, Employers Tax Guide” for more specific information.

Another source of confusion is what form or schedule you should use for a small business with a sole proprietor. You use either Schedule C or Schedule C-EZ and attach it to your Form 1040. These schedules are essentially simple profit and loss statements.

Schedule C-EZ is the simpler of the two but there are requirements that you must meet in order to be able to use it:

*You can operate only one small business and have no employees. *Your business must have earned a net profit for the tax year for which you are filing. *Your business expenses must be less than $2,500. *Your business must not hold inventory and must use the cash accounting method. *You don’t take a home office deduction. *You don’t have to file Form 4562, Depreciation and Amortization, for the business.

If you don’t meet these requirements, then you have to file using the slightly more complex Schedule C.

If you wait until the end of the year tax deadline to pay all your taxes for the year, you’ll end up paying a penalty on top of taxes. Ante up those estimated taxes every quarter, even though it may be painful. The Internal Revenue Service (IRS) requires that small business owners pay taxes as they earn income throughout the year.

For a sole proprietorship, your federal tax estimated payments are divided up in four payments: April, June, September, and January. Use Form 1040-ES, Estimated Taxes for Individuals, in order to calculate and pay your estimated taxes.

Small businesses can file using paper returns, or more conveniently, they can file electronically. If you do not feel comfortable with calculating and filing your own federal taxes as a small business owner, seek assistance from a Certified Public Accountant (CPA) or an IRS enrolled agent (EA). They can help you prevent costly mistakes.

Rosemary Carlson is a contributing writer at MedioCom.net. This well designed and easy to navigate site has quality and affordable feature stories, articles and images. You can pick and choose from a wide variety of timely and relevant topics, all easily accessed through www.mediocom.net. All services are provided in English and Spanish. Check it out today!