U.S. Small Business, Self-Employed, Other Corporate Income Tax FAQs

U.S. Small Business, Self-Employed, Other Corporate Income Tax FAQs

We're about to hire employees and need to know how much federal income tax to withhold and where to send this money along with other employment taxes?
 
Answer:
You'll need to:

Secure a completed Form W-4, Employee's Withholding Certificate from each employee to know how much federal income tax to withhold from your employee's wages.
Use Publication 15, (Circular E), Employer's Tax Guide, Publication 15-A, Employer's Supplemental Tax Guide, and Publication 15-T, Federal Income Tax Withholding Methods to determine the amount of withholding and the directions on depositing the withheld amounts and other employment taxes.  Also, refer to Form 941, Employer's QUARTERLY Federal Tax Return and the Instructions for Form 941, or Form 944, Employer's ANNUAL Federal Tax Return and the Instructions for Form 944, or Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return and the Instructions for Form 940.
Generally, employers are required to file Forms 941 quarterly. However, some small employers (those whose annual liability for social security, Medicare, and withheld federal income taxes is $1,000 or less for the year) may file Form 944 annually instead of Forms 941. See the Instructions for Form 944 for more information. Employers are also generally required to file Form 940 annually. See Topic 759 for more information about Form 940. Employers must also file a Form W-2, Wage and Tax Statement annually for each employee along with a Form W-3, Transmittal of Wage and Tax Statements, and furnish a copy of the Form W-2 to the employee.

Monthly or semiweekly deposits may be required for taxes reported on Form 941 (or Form 944), and quarterly deposits may be required for taxes reported on Form 940. Employers should consult each form’s instructions or Publication 15 to determine when and how to make deposits.

The Modernized e-File (MeF) for Employment Taxes and E-File Employment Tax Forms pages offer ways to file Forms 940, 941, and 944 electronically. Prospective participants must first complete and submit an IRS e-file application. You can complete the IRS e-file application online after registering for e-services. Employers must deposit all employment taxes electronically by electronic funds transfer (EFT). For more information on making federal tax deposits, see section 11 of Publication 15.

Additional Information:
Small Business and Self-Employed Tax Center
Subcategory:
Forms 940, 941, 944 and 1040 (Sch H) Employment Taxes
Category:
Small Business, Self-Employed, Other Business
What's the difference between a Form W-2 and a Form 1099-MISC or Form 1099-NEC?
 
Answer:
Although these forms are called information returns, they serve different functions.

Employers use Form W-2, Wage and Tax Statement to:

Report wages, tips, and other compensation paid to an employee.
Report the employee's income and social security taxes withheld and other information.
Employers furnish the Form W-2 to the employee and the Social Security Administration. The Social Security Administration shares the information with the Internal Revenue Service.

Payers use Form 1099-MISC, Miscellaneous Information or Form 1099-NEC, Nonemployee Compensation to:

Report payments made of at least $600 in the course of a trade or business to a person who's not an employee for services, payments to an attorney, or any amount of federal income tax withheld under the backup withholding rules (Form 1099-NEC).
Report payments of $10 or more made in the course of a trade or business in gross royalties or broker payments in lieu of dividends or tax-exempt interest or $600 or more made in the course of a trade or business in rents or for other specified purposes (Form 1099-MISC).
Report sales totaling $5,000 or more of consumer products to a person on a buy-sell, a deposit-commission, or other commission basis for resale (Form 1099-NEC or Form 1099-MISC).
Report payment information to the IRS and the person or business that received the payment.
Additional Information:
Tax Topic 752 - Forms W-2 and W-3 - Where, When, and How to File
General Instructions for Forms W-2 and W-3
Instructions for Forms 1099-MISC and 1099-NEC, Miscellaneous Information and Nonemployee Compensation
Subcategory:
Form 1099-NEC & Independent Contractors
Category:
Small Business, Self-Employed, Other Business
How do you determine if a worker is an employee or an independent contractor?
 
Answer:
The determination can be complex and depends on the facts and circumstances of each case. The determination is based on whether the person for whom the services are performed has the right to control how the worker performs the services. It's not based merely on how the worker is paid, how often the worker is paid, or whether the work is part-time or full-time.

There are three basic categories of factors that are relevant to determining a worker's classification:

Behavioral control (whether there's a right to direct or control how the worker does the work),
Financial control (whether there's a right to direct or control the business part of the work), and
Relationship of the parties (how the business and worker perceive the relationship).
For more information on employer-employee relationships, refer to Publication 15, (Circular E), Employer's Tax Guide and Publication 15-A, Employer's Supplemental Tax Guide. Also, refer to Publication 1779, Independent Contractor or EmployeePDF.

If you would like the IRS to determine whether services are performed as an employee or independent contractor, you may submit Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

Generally, if you're an independent contractor you're considered self-employed and should report your income (nonemployee compensation) on Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship). Most self-employed individuals will need to pay self-employment tax (comprised of social security and Medicare taxes) if their income (net earnings from self-employment) is $400 or more. Use Schedule SE (Form 1040), Self-Employment Tax to figure the tax due.

Generally, there's no tax withholding on income you receive as a self-employed individual as long as you provide your taxpayer identification number (TIN) to the payer. However, you may be subject to the requirement to make quarterly estimated tax payments. If you are required to but do not make timely estimated tax payments, the IRS may assess a penalty for an underpayment of estimated tax. For more information on estimated tax, refer to Publication 505, Tax Withholding and Estimated Tax. Unlike independent contractors, employees generally pay income tax and their share of social security and Medicare taxes through payroll deductions (withholding).
 

Additional Information:
Tax Topic 407 - Business Income
Tax Topic 762 - Independent Contractor vs. Employee
Independent Contractor (Self-Employed) or Employee?
Subcategory:
Form 1099-NEC & Independent Contractors
Category:
Small Business, Self-Employed, Other Business
I just started a small business and want to know if I must pay my income taxes quarterly or at the end of the year?
 
Answer:
You file a federal income tax return annually, but the federal income tax system is a pay-as-you-go system.

If your business is a sole proprietorship or an unincorporated single-member LLC with you as the sole owner, the income is attributable to you personally. If your business is a partnership, an unincorporated multi-member LLC, or an S corporation, the ordinary business income passes through to members and is attributable to them on their personal returns.

If you expect to owe more than the amount allowed by law at the end of the year after deducting any withholding on other income and refundable credits:

You should make quarterly estimated tax payments or increase the withholding on other income subject to withholding.
Form 1040-ES, Estimated Tax for Individuals and related instructions will assist you in determining if you need to make estimated tax payments, their due dates and how to pay them. You can also refer to Am I Required to Make Estimated Tax Payments?

When you file your income tax return each year:

Include the income from the business on your Form 1040, U.S. Individual Income Tax Return, Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship), Schedule E (Form 1040), Supplemental Income and Loss, and/or Schedule SE (Form 1040), Self-Employment Tax.
If you made estimated tax payments during the year, claim them on your individual income tax return as a payment.
Generally, all other corporations must make installment payments if they expect their estimated tax for the year to be $500 or more.

Additional Information:
Publication 542, Corporations
Publication 583, Starting a Business and Keeping Records
Publication 541, Partnerships
Publication 334, Tax Guide for Small Business
Publication 505, Tax Withholding and Estimated Tax
Small Business and Self-Employed Tax Center
Subcategory:
Starting or Ending a Business
Category:
Small Business, Self-Employed, Other Business
Are business gifts deductible?
 
Answer:
If you give business gifts in the course of your trade or business, you can deduct all or part of the costs subject to the following limitations:

You deduct no more than $25 of the cost of business gifts you give directly or indirectly to each person during your tax year.
If you and your spouse both give gifts to the same person, both of you are treated as one taxpayer.
Incidental costs such as engraving, packing or shipping aren't included in the $25 limit if they don't add substantial value to the gift.
For purposes of the $25 per person limit, don't consider gifts costing $4.00 or less that have your business name permanently engraved on the item and which you distribute on a regular basis.
Any item that could be considered either a gift or as entertainment is generally considered entertainment and cannot be deducted.
You need to have records that prove the business purpose of the gift as well as the details of the amount spent.
 

Additional Information:
Publication 463, Travel, Entertainment, Gift, and Car Expenses
Subcategory:
Income & Expenses
Category:
Small Business, Self-Employed, Other Business
I use my home for business. Can I deduct the expenses?
 
Answer:
To deduct expenses related to the part of your home used for business, you must meet specific requirements. Even then, your deduction may be limited.

You must use part of your home:

Exclusively on a regular basis as your principal place of business,
Exclusively on a regular basis as a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business,
In the case of a separate structure which isn't attached to your home, exclusively on a regular basis in connection with your trade or business
On a regular basis for storage of inventory or product samples for use in your trade or business of selling products if your home is the only fixed location of the trade or business,
For rental use, or
As a daycare facility.
Note: You don't have to meet the exclusive use test if you satisfy the rules that apply to storage, rental, or daycare use.

Beginning with tax year 2013, a simplified method is available to qualifying taxpayers. They can claim a prescribed rate of $5 per square foot (up to a maximum of 300 square feet) directly on Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship), by entering the square footage of the home and square footage of the office in the applicable boxes to indicate their election to use the simplified method. For more information, see Simplified Option for Home Office Deduction and FAQs – Simplified Method for Home Office Deduction.

Note: You may not use the simplified method for rental use of your home.

Taxpayers who don't choose the simplified method, will continue to use Form 8829, Expenses for Business Use of Your Home to compute the expense allowable as a deduction on Schedule C (Form 1040).

If you use your home in your farming business, report your expenses on Schedule F (Form 1040). Partners report their unreimbursed partnership expenses on Schedule E (Form 1040). If you are a statutory employee (box 13 of Form W-2 checked), report your expenses using the same rules as self-employed persons on Schedule C (Form 1040).

Additional Information:
Publication 587 Business Use of Your Home
Instructions for Form 8829
Subcategory:
Income & Expenses
Category:
Small Business, Self-Employed, Other Business
We hired a nanny to look after our child while we work. How do we pay her social security taxes and properly report her income?
 
Answer:
Your nanny is considered your household employee and you're her household employer:

As a household employer, you only withhold and pay social security and Medicare taxes if the cash wages you paid her exceed the threshold amount for the year. See Publication 926, Household Employer's Tax Guide.
If the amount paid is less than the threshold, you don't owe social security or Medicare taxes.
If the amount paid is more than the threshold, you must withhold your employee's share of social security and Medicare taxes unless you choose to pay both her share and your share. The taxes are 15.3% of cash wages. Your share is 7.65% and her share is 7.65%.
You may also be responsible for paying federal unemployment tax. Federal unemployment tax isn't withheld from employees' wages.
You're not required to withhold income tax from a household employees' wages. However, you and your nanny may agree for you to withhold income tax from her wages. In order to withhold income tax, have the nanny complete a Form W-4, Employee's Withholding Certificate.
If you must pay social security and Medicare taxes or federal unemployment taxes, or if you withhold income tax, you'll need to file Schedule H (Form 1040), Household Employment Taxes. You'll also need to file a Form W-2, Wage and Tax Statement and furnish a copy of the form to your nanny and Social Security Administration.
If you're paying your household employment taxes using Schedule H, to avoid an estimated tax penalty based on your household employment taxes, you can:
Ask your employer to withhold more federal income tax from your wages;
Ask the payer of your pension or annuity to withhold more federal income tax from your benefits, or;
Make estimated tax payments to the IRS or increase the payments if you already make estimated tax payments.
If you're a household employer with a business that has employees, you may pay your household employment taxes with your business or farm employment taxes, and you must include your household employment taxes with those other employment taxes on Form 941, Employer's QUARTERLY Federal Tax Return, Form 944, Employer's ANNUAL Federal Tax Return or Form 943, Employer's Annual Federal Tax Return for Agricultural Employees, and on Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return.
Additional Information:
Tax Topic 756 - Employment Taxes for Household Employees
Small Business and Self-Employed Tax Center
Subcategory:
Forms 940, 941, 944 and 1040 (Sch H) Employment Taxes
Category:
Small Business, Self-Employed, Other Business
Does a small company that operates as a sole proprietorship need an employer identification number (EIN)?
 
Answer:
A sole proprietor without employees and who doesn't file any excise or pension plan tax returns doesn't need an EIN (but can get one). In this instance, the sole proprietor uses his or her social security number (instead of an EIN) as the taxpayer identification number. However, at any time the sole proprietor hires an employee or needs to file an excise or pension plan tax return, the sole proprietor will need an EIN for the business and can't use his or her social security number.
If you have an existing EIN as a sole proprietor and become a sole owner of a Limited Liability Company (LLC) that has employees or needs to file an excise or pension plan tax return, you need to get a separate EIN for the LLC to file employment taxes.
Additional Information:
Publication 1635, Employer Identification Number - Understanding Your EIN (PDF)
Publication 334, Tax Guide for Small Business
Form SS-4, Application for Employer Identification Number (PDF)
Small Business and Self-Employed Tax Center
Subcategory:
Form SS-4 & Employer Identification Number (EIN)
Category:
Small Business, Self-Employed, Other Business
How do you distinguish between a business and a hobby?
 
Answer:
In making the distinction between a hobby or business activity, take into account all facts and circumstances with respect to the activity. A hobby activity is an activity not done for profit. This includes activities done mainly for sport, recreation, or pleasure. No one factor alone is decisive. You must generally consider these factors in determining whether an activity is a business engaged in making a profit:

Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.
Whether you have personal motives in carrying on the activity.
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 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.
You may find more information on this topic in section 1.183-2(b) of the Federal Tax Regulations.

 

Additional Information:
Publication 535, Business Expenses
Subcategory:
Income & Expenses
Category:
Small Business, Self-Employed, Other Business
Can a married couple operate a business as a sole proprietorship or do they need to be a partnership?
 
Answer:
Unless a business meets the requirements listed below to be a qualified joint venture, a sole proprietorship must be solely owned by one spouse, and the other spouse can work in the business as an employee. A business jointly owned and operated by a married couple is a partnership (and should file Form 1065, U.S. Return of Partnership Income) unless the spouses qualify and elect to have the business be treated as a qualified joint venture, or they operate their business in one of the nine community property states.

A married couple who jointly own and operate a trade or business may choose for each spouse to be treated as a sole proprietor by electing to file as a qualified joint venture. Requirements for a qualified joint venture:

The only members in the joint venture are a married couple who file a joint tax return,
The spouses own and operate the trade or business as co-owners (and not in the name of a state law entity such as an LLC or LLP),
Both spouses materially participate in the trade or business, or maintain a farm as a rental business without materially participating (for self-employment tax purposes) in the operation or management of the farm, and
Both spouses must elect qualified joint venture status on Form 1040, U.S. Individual Income Tax Return or Form 1040-SR, U.S. Tax Return for Seniors by dividing the items of income, gain, loss, deduction, credit, and expenses in accordance with their respective interests in such venture. Each spouse files with the Form 1040 or Form 1040-SR a separate Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship), Schedule F (Form 1040), Profit or Loss From Farming, or Form 4835, Farm Rental Income and Expenses, accordingly, and if required, a separate Schedule SE (Form 1040), Self-Employment Tax to pay self-employment tax.
For more information about the qualified joint venture rules, see Election for Married Couples Unincorporated Businesses.

Married couple businesses in community property states may sometimes qualify to be treated similarly to a sole proprietorship. For Special Rules for Spouses in Community States, see Revenue Procedure 2002-69PDF and the Instructions for Schedule C.

Additional Information:
Publication 334, Tax Guide for Small Business
Publication 925, Passive Activity and At-Risk Rules
Publication 541, Partnerships
Subcategory:
Entities
Category:
Small Business, Self-Employed, Other Business