There’s no way around it. When you open your own business, you’re going to have to become mighty familiar with taxes.
Of course, you’ll engage a qualified accountant (a CPA, preferably) to ensure your payroll is properly calculated, but it’s a good idea to at least know what taxes you’ll be liable for as you get ready to open for business. Particularly if you’re coming from a job where all of the taxes were tidily summarized on your weekly pay stub, it’s helpful to get an idea of just what all of those columns will mean to you as the boss.
Employer Identification Number
First and foremost, you will need to apply for an Employer Identification Number (EIN), also known as a Federal Tax Identification Number. Basically, this is like a social security number for your business. It is the unique number that identifies your company as a business entity. Without it, you won’t be able to open a business bank account or file tax returns.
You will need to apply for an EIN if any of the following statements apply to your business:
- You have employees.
- Your business is a corporation or partnership.
- You file returns for Employment Tax, Excise Tax, or Alcohol, Tobacco and Firearms Tax.
- You withhold taxes on income, other than wages, paid to a non-resident alien.
- You have a Keogh plan.
Federal Income Tax, Social Security, and Medicare
Most business owners are required to withhold federal income tax from the wages of all employees. In addition, you must withhold a portion of social security and Medicare taxes, and the company pays the remaining portion. So, yes, if you are self-employed, you will feel as though you are paying social security taxes twice – once as an employee, and once as the employer. Sorry, but it’s unavoidable.
Federal Unemployment Tax (FUTA)
This tax is the sole responsibility of the employer. No portion of this is withheld from employees’ wages.
Self-employment (SE) Tax
This is a social security and Medicare tax for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners. The advantage for business owners is the ability to deduct half of your SE tax in calculating your adjusted gross income.
These are the highlights of the taxes imposed by the federal government. Remember that you will also be responsible for withholding any applicable state and local taxes. If your employees are members of certain trade unions, you may also be required to withhold a portion of their salary as mandated by the union.