Small Business Has Big Tax Implications

Small-business owners wear many hats. They are experts in their fields and handle human resources, information technology and even tax issues, and taxes often end up being neglected until the last minute.

But, the smaller the business, the less attention the IRS pays to it, right? Wrong.

Small businesses with assets under $10 million are a focus for IRS tax audits. For this very big reason alone, it is important for small-business owners to keep good records. This also will ensure business owners get the tax breaks they're entitled.

Here's how small-business owners can stay on top of their tax situations:

Four taxes to know

Small-business owners have an obligation to withhold federal income tax, and may also be required to withhold state and local income taxes from their employees' wages, just like larger entities. The federal taxes that must be withheld from employee's wages are federal income tax, Social Security tax and Medicare tax. Employers withhold half of the total Social Security tax and Medicare tax liabilities from their employees' wages and pay the other half. The federal unemployment tax, which funds the compensation workers who lose their jobs receive, is paid completely by employers.

Depositing taxes

Accurate, timely bookkeeping can save headaches down the road, and this includes depositing taxes when they are due. Small businesses must deposit the federal income tax withholding along with the employer and employee portions of Social Security and Medicare taxes. This can be done electronically or by mailing or delivering a payment with Form 8109 to an authorized financial institution. Electronic deposits can be made using the Electronic Federal Tax Payment System, which is a free, 24/7 system provided by the U.S. Department of the Treasury. Payments using this method can be made online or via phone.

Filing W-2s

Form W-2 reports the wages, tips and other compensation paid to an employee, as well as the withheld income tax, Social Security tax, Medicare tax and any advanced earned income tax credit payments.

W-2 forms must be filed with the Social Security Administration by these dates:

• Paper forms – the last day of February (March 1, 2012, for 2011 forms)
• Electronic forms – March 31.

These forms can be filed free of charge at the Social Security Administration's Web site. An advantage of this is that copies can be printed for employees, state taxing agencies, etc. No matter what filing method is used, W-2s are due to employees by Jan. 31 (Feb. 1, 2012, for 2011 forms). This deadline is met if the forms are properly addressed and mailed to employees on or before the deadline.

For more information about small-business taxes, visit a tax and financial professional.

John Kendrix is a Senior Tax Advisor at H&R Block in Canton, GA.  You can reach him by calling 770-479-2159.