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Business Taxes Guide

Most Americans are required to submit a personal income tax return, and the months leading up to the April 15th filing deadline are called the “tax season.” For business owners, the “tax season” begins on Jan. 1 and ends on Dec. 31. That’s because businesses must do far more than submit an annual tax return. 

 

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What Taxes Are Businesses Required to Pay?

In addition to regular estimated income tax payments, businesses are expected to submit payroll and sales taxes in a timely manner and comply with myriad wage and hour, workers compensation, and state unemployment laws. Meeting these requirements can be difficult because the rules and regulations are complex and change often. But the effort is necessary because the consequences of noncompliance can be severe. 


Why is Tax Compliance Critical for Businesses?

Tax compliance is a critical issue for businesses of all sizes because the Internal Revenue Service devotes a large part of its enforcement budget to pursuing companies that miss deadlines or underpay their taxes.  

The difference between the taxes paid by Americans and the amount they actually owe is called the tax gap, and the IRS puts this figure at $458 billion. The agency wants this money, and small business owners are in their crosshairs.  

The IRS says that small business owners underreport their income by as much as 57% (1), which is why the agency devotes so much of its funding and manpower to cracking down on business tax noncompliance.

Common Types of Taxes for Businesses

Employees or service providers tasked with business tax compliance have more than the IRS to worry about. Most states collect a business income tax, and all but a handful have some sort of sales tax in place.  

Companies with hourly or salaried workers are expected to deduct payroll taxes from their workers’ paychecks and then submit this money along with their own contribution to the federal government. They must also submit state payroll taxes that are collected to fund unemployment programs.

Income Taxes

Most businesses make estimated income tax payments to the IRS every quarter. LLCs that expect to owe less than $1,000 in taxes and S corporations that expect to owe less than $500 to the IRS are not required to make monthly payments (2). 

Estimated taxes are necessary because the government needs a steady revenue flow to function. The tax deducted from a paycheck is an estimate of how much that worker will owe on the money they earned, and a quarterly business tax payment is an estimate of how much that company will owe based on its earnings up to that point.  
 
Businesses submit tax returns just like individuals, but the forms they complete and the taxes they pay differ. Businesses can be formed as sole proprietorships, partnerships, C corporations, S corporations and LLCs, and all these entities are taxed differently. 

Self-Employment Tax

The Social Security and Medicare programs were put into place to support and care for Americans in their retirement years, and self-employment taxes are collected to make sure that even people who work for themselves contribute to them. The current self-employment tax rate is 15.3%, and it is collected on the first $147,000 of wages, tips and other income. 

Payroll Taxes

Employees who are new to the workforce and have just received their first paychecks often ask HR departments what MEDICARE and FICA mean. These payroll deductions meet the requirements of the Medicare Federal Insurance Contributions Act and the Federal Insurance Contributions Act, and they fund the retirements and health care of millions of American seniors.  

Social Security

The current payroll tax rate is 12.4% to cover Social Security and 2.9% to cover Medicare for a total of 15.3%. This burden is shared equally by employers and workers. Employers deduct 6.2% from their workers’ paychecks to cover Social Security and 1.45% to cover Medicare, and they match this contribution when they submit the money to the government. There is a wage base limit in place that stops Social Security payments when an income threshold is met. The current wage base limit is $147,000. 

Medicare

There is no wage base limit for Medicare contributions, which means all income is subject to the tax. However, there is an additional Medicare tax levied on workers when their earnings surpass $200,000 during a calendar year. These workers pay an additional 0.9% Medicare tax on income in excess of $200,000, but their employers are not required to match this extra payment. 

 

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Federal Unemployment

The federal government likely love acronyms, and FUTA is one of its best. This stands for the Federal Unemployment Tax Act, which was passed in 1939 to help workers who found themselves jobless during the Great Depression. 

While MEDICARE and FICA payments are made by both workers and employers, FUTA contributions are made only by employers. (3) The current FUTA tax rate is 6% of the first $7,000 in income. 

State Unemployment

State unemployment taxes are sometimes called SUTA, but there is no law with that name. Every state has an unemployment program, but the payments and thresholds vary widely from place to place. Employer contributions are as low as 1% in some parts of the country, but states with more generous unemployment programs can collect as much as 8%. State lawmakers tend to set higher payment thresholds than the federal government. The cutoff for FUTA contributions has been set at $7,000, but many states have set a SUTA threshold of $10,000 or $15,000. (4) 

Excise Taxes

Unlike income and payroll taxes, excise taxes are not paid by all businesses. These are taxes paid by companies that sell products the government wishes to impose an additional tax on.  

The excise taxes collected on alcohol, tobacco and gasoline are designed to deter people from drinking and smoking and encourage them to buy more fuel-efficient vehicles. They also provide the government with much-needed resources. In many parts of the country, businesses are expected to pay state as well as federal excise taxes on some products. 

Industry Specific Tax Implications

Businesses engaged in activities that require a lot of supervision are often expected to pay extra taxes to cover the costs of regulatory enforcement. Companies involved in gas and oil extraction pay these excise taxes, and so do businesses that offer tanning facilities and sports wagering services.  

 

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Federal and State Taxes

State lawmakers need money to fund important programs just as much as Congress, and they are just as tenacious in their collection efforts. South Dakota and Wyoming do not collect a business income tax, and Washington, Texas, Ohio, and Nevada collect a gross receipts tax instead of an income tax. 

In addition to paying state and local income taxes, businesses in some large cities are expected to make local income tax payments or deduct commuter taxes from the paychecks of employees who work in the city but live in the suburbs. (5) 

Local City, County, and Municipal Taxes

Most states require businesses to pay estimated income taxes quarterly, and the consequences of missing a payment or paying less than the amount due can be severe. Other local and municipal costs that businesses may have to pay to remain on the right side of the law include, annual franchise fees, annual reporting fees, and permit and license fees. 

Sales Tax

Just about every business that sells tangible products is expected to collect sales taxes from their customers, and state lawmakers like to receive this money quickly.  

Most states require businesses with more than a few hundred dollars in sales to make sales tax payments every month, and the amount submitted is expected to be correct. This is money that businesses have already collected on behalf of the government, so there can be few excuses for nonpayment. Certain products, such as food, schoolbooks, and children's clothing are exempt from sales tax.

 

Additional Non-Tax Business Regulatory Expenses

The regulatory landscape is becoming more difficult to navigate for businesses of all sizes. Waste disposal practices that would not have raised eyebrows a couple of decades ago could now lead to severe sanctions, and widespread professional malfeasance has led to strict insurance requirements for doctors and lawyers.  

Nearly all employers are required to participate in state workers’ compensation programs, and they are also expected to comply with labor laws like the Fair Labor Standards Act.

 

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Challenges with Tax Compliance for Businesses

Keeping up with all these laws, rules and regulations is no simple matter, but compliance is not something that can be ignored. The average taxpayer has about a 1% chance of being audited by the IRS, but that figure is more than twice as high among small business owners. The information age has given officials sophisticated new ways to monitor and scrutinize the business community, which has ushered in a new era of rigorous enforcement. 

Changing Tax Legislature

The compliance goalposts are constantly shifting for business owners. Deductions come and go and government priorities change. Lawmakers once used the tax code to encourage business expansion and growth, but it now rewards companies that protect the environment or offer their employees retirement plans. (7) 

Horizon Payroll Solutions provides its clients with regular alerts and updates that makes staying abreast of and complying with federal, state, and local tax laws much easier.

Miscalculations Can Cause Non-Compliance

If your business submits an incorrect tax return because you relied on out-of-date information or made a simple math error, you could pay a penalty of up to 20%. This is assuming that you can convince the government that you were negligent and not fraudulent. If the IRS suspects fraud, the case may be turned over to criminal investigators, and things could escalate. 

 

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Non-Compliance Can Lead to Significant Fines and Penalties

Government revenue agencies like the IRS are primarily interested in collecting what they are owed, and they are generally easy to deal with when taxpayers are cooperative.  

However, when letters from the IRS are ignored, the agencies collection efforts tend to become quite aggressive. IRS agents can seek court orders to drain business bank accounts and seize business assets, but steps like these are only taken as a last resort.  

The IRS can also seize the estates of individuals who die with unpaid taxes and be listed as a creditor on business bankruptcy filings, so escaping taxes is all but impossible. The best policy in these situations is to pay up as quickly as you can and keep fees and penalties to a minimum.

Partnering with a Professional for Your Business Taxes

Noncompliance can do a lot more than get businesses into trouble with the IRS and state and local revenue collectors, it can also ruin business reputations. A company that has been sanctioned for violating minimum wage or overtime laws may not look very appealing to prospective employees, and a company struggling with tax problems may not look very appealing to lenders.

Fortunately, Horizon Payroll offers professional services that take the hard work and stress out of compliance. Our finance and HR professionals pore over new tax and labor laws as soon as they are signed, which allows our clients to focus on more productive endeavors.

Horizon Offers Trusted Compliance Resources and Services

Horizon’s compliance and HR resources and services include hiring and onboarding assistance, time and attendance monitoring, employee benefits packages and payroll management. Our service partners are the leaders in their industries, and our cloud-based dashboard can be accessed by any computer device with a working internet connection. 

 

Tax and HR Alerts Reporting

Changes in tax and labor laws are usually announced with great fanfare, but they rarely go into effect right away. To make sure that our clients do not forget about important dates, we send them a series of reminders.  

Our tax and HR alerts explain which businesses are covered by new regulations and what complying with the revised rules will entail. Our alerts also inform businesses about other compliance issues like OSHA safety updates and new electronic reporting requirements. 

 

View Our Business Compliance Solutions

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Professional Payroll Solutions for Any Business

Choosing a payroll services provider can be a nerve-racking experience. Managing payroll and complying with dozens of tax and labor laws is not much fun, but neither are fine print, restrictive contracts and hidden fees.  

Horizon makes things easy with a “no contract” option and a payroll solution that can be up and running in as little as 48 hours. 

Contact Us Today for More Business Compliance Resources

If you have had enough of worrying about tax compliance and would prefer to focus on more pleasant matters, you should think about putting Horizon in your corner.  

If you would like to know more about the ways we can save you time and money and keep the IRS from pestering you, please call (888) 434-8244 to speak with one of our HR professionals. If you would prefer to contact us online, you can use our contact form to schedule a demonstration or ask a question. 
 

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Sources:

(1) https://www.cfoselections.com/perspective/the-importance-of-federal-tax-compliance-for-businesses 
(2) https://www.lucahq.com/blog-posts/4-of-the-most-important-compliance-requirements-for-small-businesses 
(3)https://www.law.cornell.edu/wex/federal_unemployment_tax_act_(futa)

(4) https://unemployment-services.com/unemployment-claim-cost-employer/ 
(5) https://www.lucahq.com/blog-posts/4-of-the-most-important-compliance-requirements-for-small-businesses 
(6) https://www.thebalancesmb.com/how-does-workers-compensation-operate-in-my-state-462786 
(7) https://www.simplyretirement.com/financial-professionals/resources/small-business-startup-plan-tax-advantages 

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