What are the Tax Obligations for Small Businesses?

Small business owners are supposed to comply with the obligations for state, local, and federal taxes. To avoid being out of compliance, many business owners hire a professional to deal with their tax-related issues. Even if you decide to retain the services of a professional, it is always advisable to have an understanding of the tax obligations your business has.

Tax Obligations

Any business with a number of employees is expected to withhold tax from their paychecks for federal, state, and local income taxes, as well as FICA, unemployment, and disability insurance. Failing to pay these taxes can result in penalties and heavy fines, so it is imperative that payroll obligations are calculated correctly and paid on time.

When calculating the payroll taxes, business owners should take the following general steps:

  • Determine taxable wages
  • Determine taxable workers
  • Calculate withholding amounts

When Should Small Businesses Pay Quarterly Taxes? Quarterly taxes are paid in January, April, June, and September. The specific days vary each year. Here are a few considerations for small business owners to plan for their next tax payments:

Start with the Tax Return from the Previous Year: Unless major changes are expected in the business, the income in the upcoming year should be close to the year prior. If the company has an effective growth plan, the revenue may very well have increased. Based on expectations, a business owner should expect to owe at least as much or more in taxes each subsequent year. Of course, unexpected changes may occur and revenue could drop but this is a good starting point nonetheless.

Make Adjustments for any Major Changes: If the business plans to have some major changes like new programs, divisions, products, or events and these changes are projected to grow revenue, then this should also be taken into account when it comes time to pay quarterly taxes. The anticipated revenue increase can be taken from these changes and added to the taxable income from the previous year to arrive at a projected taxable income for the current year. These same rules apply for any major changes, which would reduce a company’s income for the year.

Adjust the Projected Income every Three Months: Start with the previous year figures and adjust for major changes every three months. Since the business owner is looking at the annual budget and cash flow projections every three months, he/she will begin to notice how the business is trending and whether or not to adjust the projected revenue. This quarterly assessment will provide a more up-to-date picture than waiting until the end of each fiscal year.

Pay Quarterly Tax Payments: To avoid interest and penalties, federal taxes should be paid quarterly with a minimum payment of 100% of what was paid the previous year. Of course, as mentioned previously, the exception to this rule would be a sizable drop in revenue over the previous year. Divide the total tax paid on the previous year return by four to arrive at the figure you should pay. This will ensure that you have no large tax balances owed when you file your return next April.

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