Fundamentals of Business Tax

Business taxes can be quite complicated for new business owners and seasoned entrepreneurs alike, so it makes sense to learn the basics of business taxes before filing. And since small businesses often receive incentives in the form of tax credits and special deductions, learning business tax basics can save your business money, too.

List of business tax deductions

This section of Business Tax Fundamentals includes a checklist of business tax deductions, an overview of payroll taxes, a manual on what a tax auditor is looking for, links to tax forms, and resources. related.

Employment and payroll taxes

Employers are responsible for withholding taxes from their employees’ paychecks, submitting them to the appropriate government agencies, and other tax obligations of the employer. The most important tax obligations are FICA, federal unemployment, and state unemployment taxes.

  • FICA – The Federal Insurance Contributions Act (FICA) provides a federal system of support for the elderly, their survivors, the disabled, and the hospitalized. As the name suggests, it works like a kind of insurance program. FICA covers the Social Security and Medicare programs. Employers must withhold a specified amount from employee wages and pay an equivalent amount. These taxes have different types and only the social security tax has a basic salary limit.
  • Federal Unemployment Tax – The Federal Unemployment Tax Act (FUTA) is the federal system for paying unemployment compensation to workers who have lost their jobs. Only the employer pays the FUTA tax, although you can generally take a credit against payment in FUTA against payments to state unemployment funds.
  • State Unemployment Tax – Each state has a different rate at which unemployment tax must be paid and different wage limits from which taxes are calculated.
  • Payroll Services – Although it is not a tax, a common expense for tax-related businesses is hiring a payroll service. Payroll services can help save time and money by calculating and processing payroll and remitting payroll taxes in a timely manner.

Business audits by the IRS

When the IRS conducts an audit of a business, they investigate much more than just the business. The IRS examines the owner closely. An awareness of typical concerns for the IRS A business owner can be careful not to take actions that may cause concern or suspicion to an IRS auditor. In some cases, some activities that may appear suspicious will be completely innocuous or even necessary. In those circumstances, additional efforts to collect and maintain records and other evidence that support their legitimate purpose can be invaluable in alleviating the researcher’s concerns. Some of the common IRS red flags agents are trained to look for include:

  • Lifestyle does not match reported income – Dressing humbly during an audit can be more effective than wearing your most intimidating or sophisticated clothing;
  • Combination of personal and business expenses – Small business owners should not mix personal and business expenses and keep records that reflect a clear division between accounts;
  • Lots of car expenses – especially when a business owner has a car that he uses for business and personal travel, a business-related auto expense record, a mileage record, and other documents can be helpful in showing that you have not included derivative expenses of personal use.
  • Cash business – Underreporting, stealing or diverting funds is easier when there are mainly cash transactions. As a result, the IRS takes a closer look at businesses that handle cash predominantly.
  • Overuse of contractors – Companies that rely heavily on “independent contractors” may be suspected of attempting to circumvent employment obligations, such as payroll taxes. If the business controls the contractors closely, the IRS can treat them as employees, resulting in back taxes and penalties.
  • Lack of income statement – Intentional breach of income statement is a criminal matter and should be taken with the utmost seriousness.
  • Taxes and unmatched employees – Incomplete or inaccurate payroll taxes can trigger an investigation. Make sure your payroll taxes are complete and match your claimed employees.

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