ABA Family Legal Guide

Forming and Operating a Small Business

Starting a Business

Tax Requirements

What are the tax issues I'll need to consider if I'm starting a small business?

Your accountant can assist you with the following federal and state tax requirements:

Federal Tax Identification Number

All businesses must obtain an Employer Identification Number (EIN), also known as a federal tax identification number, before beginning to operate. Each state also requires tax registration by a new business. In most cases, the state will use the Employer Identification Number.

You get your EIN by filing an IRS Form SS-4. You can get one from any office that has IRS forms, or online through the IRS website, www.irs.gov. If you mail the form, you'll get your EIN in four to six weeks. You can also fax the SS-4 to 816-926-7988 and the EIN number will be issued within twenty-four hours, or you can call direct (816-926-5999) and receive the EIN number verbally. If you phone, you must place the number on the SS-4 and mail it to the IRS for processing.

State Sales Tax Registration

All states that have sales taxes also require any business not exempt from the tax to register with the appropriate state agency. You'll be required to collect the tax and remit it to the state regularly (monthly or more frequently). To avoid paying taxes on the materials you buy from wholesalers, you should get a resale tax certificate from the state tax authorities. As long as you sell the product to the public, and collect the tax at that time, you shouldn't have to pay taxes to get the product in the first place.

Withholding Requirements

If you have employees (including yourself, if your business is a corporation), you'll be required to withhold federal and state income taxes and FICA (Social Security and Medicare) taxes from their wages. You have to remit these funds regularly to the IRS (in the case of federal and FICA taxes) and the applicable state tax agency. The state requirements may or may not be the same as the federal deposit requirements. All this is very confusing, but it's important to know the requirements and follow them, since there may be heavy penalties for late payment. Remember that the principal officers of the company may be personallyliable for payroll taxes that are not paid to the IRS. You may find that it pays to use a payroll tax service for this job. And any business, no matter its size, should have a tax adviser.

Unemployment Insurance Tax

Most states require your business to register or at least periodically file with the state agency that administers the state unemployment insurance tax. This tax is based on the business's payroll. Periodically, a business also must pay the federal unemployment insurance tax, which is based on its total payroll.

Federal and State Income Tax Returns

As if all this weren't enough, all businesses must file annual federal and state income tax returns. The applicable forms vary with the type of business. Partnerships, S corporations, limited liability companies, and other businesses that as a general rule pass the tax consequences of their operations to their owners file a different type of return from that of businesses that are operated as C corporations.