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We are about to hire employees and need to know how much tax to take out and where to send this money?
You will need to secure a completed Form W-4 (PDF), Employee's Withholding Allowance Certificate , from each employee. You will need Publication 15 (PDF), Circular E, Employer's Tax Guide , and Publication 15-A (PDF), Employer's Supplemental Tax Guide , to determine the amount of withholding and for directions on depositing the withholding amounts and other employment taxes.
Generally, employers will quarterly file Form 941 (PDF), Employer's Quarterly Federal Tax Return , and annually file Form 940 (PDF), Employer's Annual Federal Unemployment Tax Return (FUTA) , and Form W-2 (PDF), Wage and Tax Statemen t, with Form W-3 (PDF), Transmittal of Income and Tax Statements .
References:
Publication 15 (PDF), Circular E, Employer's Tax Guide
Publication 15-A (PDF), Employer's Supplemental Tax Guide
Form 940 (PDF), Employer's Annual Federal Unemployment Tax Return
Form 941 (PDF), Employer's Quarterly Federal Tax Return
Form W-2 (PDF), Wage and Tax Statement
Form W-3 (PDF), Transmittal of Income and Tax Statements
Form W-4 (PDF), Employee's Withholding Allowance Certificate
How do you distinguish between a business and a hobby?
Since hobby expenses are deductible only to the extent of hobby income, it is important to distinquish hobby expenses from expenses incurred in an activity engaged in for profit. In making this distinction, all facts and circumstances with respect to the activity are taken into account and no one factor is determinative. Among the factors which should normally be taken into account are the following:
Whether you carry on the activity in a businesslike manner
Whether the time and effort you put into the activity indicate you intend to make it profitable
Whether you depend on income from the activity for your livelihood
Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business)
Whether you change your methods of operation in an attempt to improve profitability
Whether you, or your advisors, have the knowledge needed to carry on the activity as a successful business
Whether you were successful in making a profit in similar activities in the past
Whether the activity makes a profit in some years, and how much profit it makes
Whether you can expect to make a future profit from the appreciation of the assets used in the activity
I use my home for business. Can I deduct the expenses?
If you use part of your home exclusively and regularly, as your principal place of business or as a place where you meet or deal with customers, you may deduct expenses for use of part of your home. If you deduct your business expenses on Form 1040, Schedule C (PDF), you must figure your deduction on Form 8829 (PDF), Expenses for Business Use of Your Home , and attach it to Form 1040 with Schedule C. For more information refer to Tax Topic 509 , Business Use of Home , or Publication 587 (PDF), Business Use of Your Home (Including Use by Day-Care Providers) .
References:
Publication 587 (PDF), Business Use of Your Home (Including Use by Day-Care Providers)
Form 1040, Schedule C (PDF), Profit or Loss from Business (Sole Proprietorship)
Form 8829 (PDF), Expenses for Business Use of Your Home
Tax Topic 509 , Business Use of Home
I use part of my living room as an office. Can I take a deduction for business use of my home?
In general, if you use a part of your home for both personal and business purposes, no expenses for business use of that part are deductible. Exceptions apply for qualified day-care providers and for the storage of inventory or product samples used in your business. For additional information on business use of your home, refer to Tax Topic 509 , or Publication 587 (PDF), Business Use of Your Home (Including Use by Day-Care Providers) .
I am self-employed. How do I report my income and how do I pay Medicare and social security taxes?
Your self-employment income is reported on Form 1040, Schedule C (PDF), Profit or Loss from Business, or on Form 1040, Schedule C-EZ (PDF), Net Profit from Business .
Your Medicare and social security taxes are reported on Form 1040, Schedule SE (PDF), Self-Employment Tax .
As a self-employed person, you pay your Medicare and social security taxes the same way you pay your income taxes. If you expect to owe less than $1,000 in total taxes, you can pay them when you file your income tax return. If you expect to owe $1,000 or more in total taxes, you will need to make estimated tax payments. These payments are made quarterly using Form 1040ES (PDF), Estimated Tax for Individuals . You will need to figure these taxes at the beginning of the year. To learn about figuring and making estimated tax payments, please refer to Publication 505 (PDF), Tax Withholding and Estimated Tax .
I am starting a small business. What assistance can IRS give me?
If you are starting or already have a small business and need information on taxes, recordkeeping, accounting practices, completing Federal business and employment tax returns, and meeting other Federal tax obligations, there is help available. Much of the assistance is free. The service is called Small Business Tax Education Program, or STEP. Go to Around the Nation for seminars in your area or check out Tax Info For Business on the IRS web site. You can find out more about this program for small business by referring to Publication 1066 (PDF), Small Business Tax Workshop , or Tax Topic 103 , Small Business Tax Education Program (STEP) .
I want to start my own business. Do I need a business license?
The IRS does not require or issue business licenses. Whether or not the particular type of business or service you provide is regulated by licensing requirements is a question for your state, city, or local government agencies. To access the state you need to direct your question to, please go to our Alphabetical State Index .
What forms do you use when you have a small business?
The annual income tax forms that you would use to report you business activity to the IRS would depend on the type of entity you operate your business under.
Sole Proprietorships use Form 1040, Schedule C (PDF), Profit and Loss from Business (Sole Proprietorship) or Form 1040, Schedule C-EZ (PDF), Net Profit from Business and Form 1040, Schedule SE (PDF), Self-employment Tax .
Partnerships use Form 1065 (PDF), U.S. Partnership Return of Income and Schedule K-1.
Corporations use Form 1120 (PDF), U.S. Corporation Income Tax Return .
S Corporations use Form 1120S (PDF), U.S. Income Tax Return for an S Corporation .
Limited Liability Companies use one of the choices above according to their structure. If you hired employees to work in your business, if you are liable for excise tax, or heavy highway vehicle use tax, other forms and publications would come into play.
I just started a small business and want to know if I have to file my income taxes quarterly or at the end of the year?
For income taxes you will likely file annually, but you may have to pay quarterly. As a self-employed individual, you must determine if you are liable for making estimated taxes which are paid on a quarterly basis. The estimated tax worksheet is Form 1040ES (PDF), Estimated Tax for Individuals . When you file your income tax return, you include the income from the business on that return. The forms to be filed are the Form 1040 (PDF), U.S. Individual Income Tax Return , Form 1040, Schedule C (PDF), Profit or Loss from Business , and Form 1040, Schedule SE (PDF), Self-employment Tax. You may qualify to use Form 1040, Schedule C-EZ (PDF), Net Profit from Business.
What deductions can I take on my partnership or S Corporation return?
In general, ordinary and necessary business expenses are deductible on business return. However, there are some items that partnership and S Corporation do not deduct at the business entity level but rather at the partner or shareholder level. These are referred to as separately stated items. For a more complete explanation of business in general, see Publication 535 (PDF) , Business Expenses Publication 541 (PDF), Partnerships , and Instructions for Form 1120S .
As a Domestic LLC (limited liability company), what forms do I use to file a return?
The form you use will depend on what kind of entity your business is for Federal tax purposes. Following are some general guidelines and the forms which go with each entity:
If your business has only one owner, it will automatically be considered to be a sole proprietorship (referred to as an entity to be disregarded as separate from its owner) unless an election is made to be treated as a corporation. A sole proprietorship files Form 1040 (PDF), U.S. Individual Income Tax Return and will include Form 1040, Schedule C (PDF), Profit or Loss from Business . If an election is made to be treated as a corporation, Form 1120 (PDF), U.S. Corporation Income Tax Return , is filed.
If your business has two or more owners, it will automatically be considered to be a partnership unless an election is made to be treated as a corporation. A partnership files Form 1065 (PDF), U.S. Partnership Return of Income . If an election is made to be treated as a corporation, Form 1120 (PDF), U.S. Corporation Income Tax Return , is filed. The election referred to is made by filing Form 8832 (PDF), Entity Classification Election .
For IRS purposes, how do I classify a limited liability company? Is it a partnership or a corporation?
A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. Unlike a partnership, none of the members of an LLC are personally liable for its debts. An LLC may be classified for Federal income tax purposes as a sole proprietorship (referred to as an entity to be disregarded as separate from its owner), partnership or a corporation. If the LLC has only one owner, it will automatically be considered to be a sole proprietorship (referred to as an entity to be disregarded as separate from its owner), unless an election is made to be treated as a corporation. If the LLC has two or more owners, it will automatically be considered to be a partnership unless an election is made to be treated as a corporation. If the LLC does not elect its classification, a default classification of partnership (multi-member LLC) or sole proprietorship (single member LLC) will apply. The election referred to is made using the Form 8832 (PDF), Entity Classification Election .
How do you determine if a person is an employee or an independent contractor?
The distinction between whether a worker is an employee or an independent contractor has important tax consequences. Worker classification affects how you pay your Federal income tax, social security and Medicare taxes, and how you file your tax return. The classification also affects your eligibility for employee benefits. Those who should be classified as employees, but aren't, may lose out on workers' compensation, unemployment benefits, and, in many cases, group insurance (including life and health), and retirement benefits.
Certain workers are considered employees by statute for purposes of the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), or for federal income tax withholding from wages. Examples of workers considered employees by statute include corporate officers, certain agent, or commision-drivers, full-time life insurance sales persons, certain home workers, certain traveling of city sales persons.
Where there is no controlling statute, a worker's status is determined by applying the common law test, which applies for purposes of FICA, FUTA, Federal income tax withholding, and the Railroad Retirement Tax Act. A worker's status under the common law test is determined by applying relevant facts that fall into three main categories: behavioral control, financial control, and the type of relationship itself. In each case, it is very important to consider all the facts - no single fact provides the answer.
If you are not sure whether you are an independent contractor or an employee, complete Form SS-8 (PDF), Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding . Publication 1779 (PDF), Employee Independent Contractor Brochure , and Publication 15-A (PDF), Employer's Supplemental Tax Guide , provide additional information on independent contractor or employee status.

 

 

 

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