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Business Tax Relief Tips
Business Payroll Taxes
If you operate a business and have any employees, you are required by the IRS to withhold payroll taxes from their paychecks. Payroll taxes that you will be withholding are at both the state (if applicable) and federal levels. For state income taxes withheld, the rate you use will be determined by your applicable state tax reporting laws. For federal income taxes, these rates are determined by the IRS.
Here are some of the payroll taxes you are required to withhold and submit (pay) to the applicable governments, along with their applicable tax forms:
FICA – Federal Insurance Contributions Act. This category is the combination of both the employer’s share and the employee’s withheld share of social security and Medicare taxes.
Federal – Federal income tax will be withheld from your employee’s paycheck based upon their claimed exemptions (IRS Form W-4) and any additional withholding amounts (if any). The federal withholding amount is in addition to the FICA amount mentioned above.
Payroll tax deposit. Each month (or sooner depending on your payroll situation) you will make a payroll tax deposit. This deposit figure will be a consist of the FICA figure mentioned above. Information on calculating the amount will be found in the IRS Circular E. You will use IRS Form 8109-B (Federal Tax Deposit Coupon) for this purpose.
Quarterly.Form 941. You will report these payroll taxes (FICA and federal withholding) on a quarterly basis by filing IRS Form 941. Information contained on the Form 941 include total wages, wages per month, employees per month, payroll tax deposits made, and any tax due amount. If you calculated your payroll tax deposits correctly, there will be little or no taxes due to the IRS when you file this form.
941 – Payment Voucher. This is the IRS Form you use to pay your quarterly tax amount due (if any).
State – If the state in which you operate a business in has a state income tax, you need to withhold this percentage from your employee’s paycheck.
Other payroll related taxes you are required to pay (but not withhold from your employees checks) include:
FUTA – Federal Unemployment tax. This payroll related tax is paid on an annual basis by using IRS Form 940 (Annual Federal Unemployment Tax Return). This tax is paid in full, one lump sum.
Alternative: There is a shorter version of the IRS Form 940 available to you if certain conditions/situations are met. You can use IRS Form 940-EZ if any of these conditions are met:
All your FUTA taxes paid were the same amount
Your business only pays FUTA to one state
Your state unemployment taxes were paid in full by January 31, 2007
You did not hire a household employee to work in your private home (domestic help) for the entire tax year
W-2.Wage & Tax Statement. This is the IRS tax form that reports the wages paid to employees. It also includes the amounts withheld for federal income taxes, state income taxes (if any), along with other needed tax information You are required by the IRS to mail this form to your employees by January 31, 2007.
W-4.Employee’s Withholding Allowance Certificate. This is one of the required tax forms you will have your employees fill out. It can be changed at any time by the employee. Your employee will use this form to claim their withholding allowances. In turn, you will use the withholding allowance to calculate your payroll withholding figures along with employee’s paychecks.
I-9. Employment Eligibility Verification. This form is used to verify, or proof, the legality of your employee to work in the United S
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Tax Benefits From A Tax Loss
DebtHelp.com Tip: Whenever you operate a business, you take the risk of incurring a loss. If this happens to you, the tax benefits you reap from a tax loss depends upon whether your business is incorporated or non-incorporated. It also depends upon whether you take an active part in the business operations, or are simply an investor.
Incorporated. In general, if your business is incorporated (a C corporation), the tax loss belongs to the corporation, not the shareholders. Your shareholders would get a tax break only in the year that your business closes or in the year they sell their stock at a loss. You will use IRS Form 1120 to report your business activities to the IRS.
Unincorporated. If you operate an unincorporated business such as sole proprietors, limited liability companies, partnerships, and Subchapter S corporations do, you can take advantage of tax loss benefits easily.
In general, you would take your business’ operating loss and put it onto your individual income tax return. The operating loss is known as a NOL (net operating loss) and occurs when your business expenses and deductions are larger than your income sources.
Your NOL can be used to offset any other income you have received. This, in turn, will lower the total amount of income that is subject to tax. You cannot, however, decrease your income to below zero by using your NOL. If your total NOL was to decrease your income below zero, you would need to carry forward or carry back the unused NOL to previous periods.
See how this can offer you a tax relief? This is a simplified description of using an NOL to your tax advantage; it is best handled by a tax professional.
Investor. If you are an investor in a business that experiences an operating loss, you are not entitled to claim any tax benefit of an ongoing business. In simple terms, you can, claim a capital loss.
Of course, there are IRS tax rules and regulations that must be met regarding any tax loss you experience in your business. Here are two:
Tax Rules. You also will not be allowed to take (deduct) your tax loss unless you can show the IRS that you operate your business with a “profit motive” in mind. The IRS wants to see that you truly have a business and simply not a hobby. Otherwise known as the ‘hobby loss rule’, the IRS must see you making a profit three out of five years in order to qualify your business venture as a true business.
For larger incorporated businesses, another tax rule that must be met is known as ‘at-risk rules’. This IRS tax rule states that you cannot deduct more than your economic investment in the venture. This is intended to target the investments known as ‘tax shelters’.
If you intend on carrying over your venture’s net operating loss (NOL), you must notify the IRS of this. There are two ways for you to do this:
You will need to attach either IRS Form 3621 (Net Operating Loss Carry-Over). This form will show the IRS how much loss is left over after the first tax year.
Or, you can send a written statement along with your income tax return for the year of your tax loss.
IRS Publication 536 provides more information on the area of NOLs.
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Business Tax Evasion Cases
The following are examples of the consequences of committing corporate and business tax evasion from the IRS website.
Small scale. Here is a real-life case about how an employer was sentenced for owing the IRS under $3,000 in employment taxes. The case is taken from the IRS website. This individual was sentenced for failing to pay taxes.
On July 17, 2006 in Kansas City, MO, Dentist Artis Lee Clark was sentenced to 12 months and one day in federal prison for failing to pay employee withholding taxes. Clark pleaded guilty in November 2005 and admitted that he withheld taxes from his employee’s wages and failed to send the $2,647 in tax money to the IRS. Larger scale. This is a real-life case where an employer was sentenced for failing to file payroll tax returns and committing employment tax fraud.
On July 13, 2006, in St. Paul, MN, Scott Kimrey Goldsmith, the former owner and president of Goldsmith & Associates, a Minneapolis law firm, was sentenced to 33 months in prison to be followed by 3 years of supervised release. Goldsmith pleaded no contest in 2005 to four counts of failing to file federal individual income tax returns and twelve counts of failing to pay employee withholding taxes that he had collected. Goldsmith did not dispute the federal government’s claim that from 1999 through 2002, he paid himself approximately $1,350,000 in salary but never filed tax returns. Moreover, he did not object to the government’s allegation that between April 1999 and March 2002, he deducted money from employee paychecks for federal income taxes, social security, and Medicare but failed to turn those funds over to the IRS. Court documents indicate that Goldsmith’s actions resulted in tax losses to the IRS and the Minnesota Department of Revenue in excess of $500,000.
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Fringe Benefits As Tax Relief
DebtHelp.com Tip: Business owners have a variety of ways to decrease their tax burden (find tax relief). One such known category is ‘fringe benefits’. Fringe benefits are usually offered in addition to an employees wages and bonuses. The entire area of fringe benefits can be a complex one, but we will list some samples of how your company can become involved in them to gain some tax relief.
Here are some areas found in the fringe benefit category:
Retirement plans. This is by far the largest category of fringe benefits being provided by employers. Of course, there are a variety of plans to choose from. By making contributions to your employee’s retirement plan, you are rewarding their loyalty and productiveness while also helping to secure their future.
Parking. When an employer pays for their employees parking, that can be deducted on the business tax return. Or, the business can pay the employee a cash stipend for parking. Either way, parking costs are an expense on the books.
Daycare. Build a daycare center on your work premises. Hire a daycare provider to come in and watch after your employee’s children. This fringe benefit will help out the numerous families that are unable to gain employment due to not finding a decent daycare provider. Employers will receive a tax credit for providing child care for their employees.
Adoption benefits. When an employer pays a third party or reimburses an employee for qualified adoption expenses they are generally tax-free up to a limit of $10,160 per adoption. There is an income exclusion phase-out between $150,000 - $190,000.
Athletic facilities. If the facilities are on property owned or leased by the employer and are used substantially by employees, their spouses, and dependent children – the fair market value of athletic facilities is tax-free. This includes gyms, swimming pools, golf courses, and tennis courts. In order to qualify for tax-free treatment, the facilities must be open to all employees on a nondiscriminatory basis.
Group term life insurance. Corporations can take advantage of the fringe benefit of paying for their employees group term life insurance. This is a great tax relief item.
Employer paid health plans. Employers can receive tax relief by paying insurance premiums or making contributions for an employer –paid health, hospitalization, or disability, and/or accident insurance policy. The plans could cover employees, spouses, and dependents.
Long term care coverage. As more and more baby boomers are taking care of their elderly parents, this type of coverage is becoming more popular. It also will cover any of your employees who become chronically ill. By offering it to your employees, you can receive a tax relief.
Educational plans. By having a written Educational Assistance Plan in place, your business can take advantage of some tax relief by financing undergraduate courses for your employees. Your plan can cover books, supplies, and tuition.
On site meals. Did you ever wonder why some employers have a cafeteria on their premises? It is because the meals are 100% deductible to the business. This is true only if the meals provided are for the convenience of the employer, however. By having employees eat onsite, it may decrease the chances of extended lunch hours. It also saves the employer from being concerned about possible accidents outside of the workplace (such as an employee being involved in a car accident during their lunch break).
As can be seen, business tax relief is easily obtainable by providing employees with a variety of fringe benefits. The fringe benefits are treated and classified as a business expense on your tax return.
Your fringe benefit plan must be in compliance with IRS tax laws, otherwise your previous contributions or deductions to the
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Tax Relief From State Taxes
Whatever state you operate your business in, there will be a state tax of some sort. In general, state business taxes provide a business with tax relief due their deductibility. Business taxes vary according to individual states. Wherever the principal place of your business operations is located that will be the state tax laws that you will need to follow. For instance, your business is located and operates in Florida. You need to know and follow Florida’s state tax laws.
The most state revenue is generated from income taxes. Only seven states in the United States do not impose a state income tax.
In addition to paying income taxes, businesses pay a number of other taxes to their state’s taxing authority. Be certain you are familiar with your individual state’s tax laws and regulations. You can only benefit by this. Here are some other taxes at the state level that your business may be responsible for:
Business and Occupational tax. This tax is based on the gross income of a business entity. Rates vary according to the business activity code.
Sales and use tax. Just about every state imposes a sales tax on items a business sells. Each state has different sales tax rules and regulations to follow regarding the collection and exemptions involved. Usually the seller is responsible for collecting and paying state sales tax whether it has been collected from the buyer or not.
The use portion of the tax involves out-of-state purchases of goods where no sales tax has been paid yet.
Business transfer taxes. Be prepared to pay a business transfer tax if your business changes ownership. Your state may impose this tax on either the seller, buyer, or both parties.
Real estate taxes. Be prepared to pay your state an annual tax on any real estate your business owns.
Personal property taxes. Some states impose an annual tax on the value any equipment and vehicles your business owns and uses in its operations.
(These two combined business taxes are known as real and personal property taxes.)
Payroll taxes. All states with income taxes have a payroll taxes, deduction and collection system similar to the federal system.
Excise taxes. Another source of business tax revenue states receive is from imposing an excise tax on items such as alcohol, cigarettes and other tobacco items, motor fuel, and alcohol (wine, beer, distilled spirits). If your business is involved in buying or selling any of these items, you will be responsible for the corresponding taxes to the state. Check with your state to be certain.
Out-of-state taxes. If you employ anyone not living in your state, you can be responsible for withholding taxes from your nonresidents’ paycheck, then paying state income taxes to their home state.
State and local agencies. To find out more information about what your individual state needs for proper business tax reporting, you can do two things. One, you can visit the IRS website to find links to various state taxing authorities. Second, you can visit a websites such as statelocalgov.net and taxadmin.org. Or, look in your phone directory under State Government.
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Unpaid Payroll Taxes
DebtHelp.com Tip: One area which you need to concern yourself about is paying your payroll taxes on time. Be certain that you pay them on time, by the due date, or you will face stiff consequences from the IRS. The IRS may allow leniency regarding other taxes, but current payroll taxes is not one of them.
If you are late paying your current payroll taxes (making your payroll tax deposits), the IRS will shut down your business. Make certain that you make your current payroll tax deposits on time to avoid this.
For past due payroll taxes, you may be allowed to keep your doors open only if you make arrangements to pay off your past due balance.
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Small Business Tax Relief
If you own and operate a small business, the IRS tax laws offer you a variety of ways to receive tax relief and lessen your tax burden.
Children. You have probably seen those television commercials involving children promoting their parent’s business, right? Have you ever wondered why someone would do that? There is a tax benefit, that is why. You can easily lower your business’s taxable income (thereby providing a tax relief) by putting your children on your payroll. You can do this tax-free for up to $4,850. In order to do this, however, your children must be employed doing legitimate work for you.
Parents. The same principal applies by hiring your parents. The work you hire them to do must be legitimate and productive to your business operations.
You. Pay yourself a salary instead of a draw. Your salary would be in the form of either a guaranteed payment or wage figure. In other words, put yourself on your company payroll. By doing this, you will decrease your taxable income. By decreasing your taxable income (as mentioned above), you will be giving yourself some tax relief. In addition to receiving tax relief, you will be able to put yourself into your company retirement plan. That will help you receive more tax relief, also.
One important benefit of putting yourself of your company’s payroll is the fact that it will generate earned income for you. You need to have earned income in order to qualify to make contributions to any retirement plan (or other fringe benefit programs) your company may have.
Retirement plans. By implementing a company retirement plan, you will receive tax relief by lowering your taxable income. In fact, company retirement plans are the number one fringe benefit available to employees. Therefore, they create the largest tax relief for the employer.
Expensing. Another great way to receive tax relief is to expense smaller value asset items instead of capitalizing them. Instead of having the item show up on your books as an asset, it will show up as an expense. This can be accomplished by developing an expense policy that states items that are purchased for under $100 are to be treated as an expense and not an asset on your books. In simplified terms, assets increase taxable income while deductions reduce taxable income. By reducing taxable income, obviously, tax relief is imminent.
Personal assets. You can receive tax relief by putting some of your personal assets into business use. For instance, use your car for business purposes. You can deduct depreciation, mileage, repairs and other related expenses during your business operations. Be sure to document everything.
Home Office. Operating a home office is a beneficial way to receive tax relief in a wide variety of ways. The IRS requires your home office to be: 1) your principal place of business for any trade or business; and 2) a place where you meet or deal with clients, customers, or patients. Your home office must also be used exclusively and regularly for business purposes.
Most expenses related to a home business are tax deductible, with some limitations. There are many IRS rules and regulations to follow regarding operating a home business. It is important to know these tax laws since home office operations are known as an IRS ‘audit red flag’ area. Many taxpayers who think they qualify for a home office deduction, actually do not.
Schedule C filers (self employed, for instance) will use IRS Form 8829 (Expenses for Business Use of Your Home) to calculate the deduction. Employees with unreimbursed job-related expenses will use IRS Form 2106 (Employee Business Expenses).
This is a simplified description of all that is involved in claiming a home office deduction. For more information, read IRS Publication 587.
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Corporate Tax Evasion
There are a variety of ways for businesses and corporations to partake in IRS tax evasion. The end result hurts two parties: the federal government, and the individual employees. The federal government suffers due to loss income. The individual employees suffer due to decreased funding of their future social security and/or Medicare benefits.
Failure to file. When employers fail to file payroll and employment tax returns, they are committing tax evasion. By not filing a payroll tax return, the IRS will have no record of how much the business owes in taxes.
Filing false payroll tax returns. If an employer files payroll tax returns reporting the improper amount of wages that taxes are based on, this can be viewed as tax evasion by the IRS.
Pyramiding. This tax evasion scheme involves employers withholding payroll and employment taxes from the employees paychecks, but not reporting or paying the taxes to the IRS. Usually, the company will do this for a while, accumulate the liabilities, and then just file for bankruptcy. Upon filing for bankruptcy, the payroll tax liability is discharged. Once this happens, the company will open up under a new name and start the process all over again.
Outsourcing/Employee Leasing. When an employer hires an outside firm or individual to do certain company tasks, this process is known as outsourcing or employee leasing. In and of itself, it is a legal practice/business. For instance, instead of the company doing its own payroll or administrative tasks, they ‘outsource’ an independent firm to do the payroll processing work. However, employee leasing and outsourcing have been known to be involved a tax evasion scheme. The independent firm prepares payroll, withholds the employee taxes, but does not submit the taxes to the IRS. This is a form of tax evasion, and is one known scheme used for this purpose.
Paying in cash. Paying employees and business vendors in cash is a common way for employers to avoid paying both income and payroll taxes. Usually employers who operate via the cash transaction route, will not report any payroll tax withholding to the IRS, since they do not withhold any taxes from the employee’s pay.
