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When does a Business Start Paying Taxes? A 101 in Small Business Tax Requirements

By Caron Beesley
"When does a Business Start Paying Taxes?" may sound like a silly question, with an expected answer of: "When you start making a profit, of course." Not necessarily.

There are many dependencies that determine when a new small business owner is liable for their first tax payment. For example, the moment you hire your first employee you must deposit payroll taxes. If you are in the consumer retail business, you must deal with sales tax. Then there are federal and state income taxes, which you must pay once a quarter, and so on.

Quite the minefield!

Below are some tips and resources that can help you navigate through your tax obligations as a new business owner.

1. Determine Your Income Tax Requirements and Manage your Payments

When I first went into business I was blissfully unaware that if you expect to pay more than $1000 in business tax in one year, then you must estimate your federal and state income tax payment each quarter and remit it to the IRS and your state before each quarterly deadline (estimated taxes are due four times a year: April 15, June 15, September 15, and January 15).

The truth is, many budding entrepreneurs ignore their income tax commitments until it's a little too late. And if you don't plan ahead and set-aside enough money to cover your quarterly payment, the results can be devastating in terms of cash flow.

To pay your quarterly income tax (not subject to withholdings), you will need to complete the appropriate form for your type of business structure. For example, if your business is an LLC, the LLC gets taxed separate from the owners, while sole proprietors report their personal and business income taxes using the same form. More on how your business structure affects your tax liability and which forms you will need here.

You can use your previous year's tax return as a guide as to what your payment will be, but good record keeping and business forecasting will also help you "set aside" the right amount of taxable income as it comes into your business.   Don't forget to deduct business expenses from your base income before you calculate your tax estimate.

You should pay your state income tax at the same time. Find links to your state's tax office for the appropriate forms here.

2. Paying Sales Tax - Does it Apply to You?

Sales tax applies to certain retail products (rarely services) and if your business has a physical presence in a state, such as a store, office or warehouse, you must apply for a sales tax permit and collect applicable state and local sales tax from your customers. You will then pass that sales tax on to your state revenue office on a monthly or quarterly basis.

Determining whether your business qualifies as having physical presence in a particular state (say, if you own a warehouse in Virginia but sell your services in Pennsylvania) and the implications on sales tax collection can be confusing. Contact your state's revenue agency or talk to your local SBA representative if you are unsure.

If you operate an online e-commerce site, read up on collecting sales taxes over the Internet.

Certain states are exempt from sales tax including Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon. 

3. Employment Tax - Withholding and Matching

If you start your business and immediately have employees on your payroll, you'll need to withhold Social Security (FICA), Medicare and federal and state income taxes from their salaries. You must also match your employees FICA and Medicare taxes and pay this matching along with your employee's tax. You are also required by law to pay federal and state unemployment taxes.

Read Employment Tax 101- Know Your Withholding, Payment and Reporting Obligations in which I map out seven steps for withholding, paying, and reporting employment taxes. Follow these, and be sure to bookmark the "Small Business Guide to Employment Taxes" on Business.gov.

4. Working with Freelancers and Independent Contractors - Know your Tax Obligations

Bringing on a self-employed contractor, instead of adding to direct employee headcount, can save a small business owner as much as 30 percent (per worker) in additional payroll taxes and benefits. Read Working with Independent Contractors: Understanding Tax Requirements, which outlines three steps you need to take to ensure regulatory compliance when hiring an independent contractor.

5. Taking Care of Business Property Taxes

If you own or conduct business in a commercial real estate location you will need to pay property tax to your state. If you lease the property, check your lease to determine whether you or the owner is liable. 

States also collect property tax for business assets such as vehicles and even computer equipment and peripherals. Read more in this Allbusiness.com article, The Basics of Business Property Tax; when in doubt check with your state's tax office.

6. Tax Deductions and Expenses

Many small business owners under-estimate the scope of their deductions. For small businesses and home-based businesses in particular, getting it wrong can leave you vulnerable to an IRS audit.

Read Tax Deduction 101 for Small Business, which includes basic guidance from the government that will help you take all the deductions that you deserve.

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