Most small businesses have to comply with a different set of rules than individual taxpayers. A business tax attorney can be a crucial resource for small businesses, particularly when a business is facing issues with the IRS regarding unpaid taxes. Learn more about how a tax attorney can help your small business comply with the requirements of the Internal Revenue Service.
Ask a Small Business Tax Lawyer: What Are Small Business Taxes?
A small business has to pay several taxes to meet the regulations outlined for small companies and organizations. Although a company will benefit from business tax deductions, most companies will still have to pay income taxes, payroll taxes, and sales taxes. The tax rates for each of these tax obligations will be determined by current federal and state guidelines. A business tax attorney can help you plan ahead to ensure you are paying everything you need to.
Small business owners are obligated to pay income tax on any income that is over $400. This means that if an individual has earned at least $400 in profits from a business, they will need to file business taxes on state and federal returns. Most tax pros recommend setting aside at least 30% of business income to pay taxes.
A payroll tax is a special deduction made on an employee’s payroll that sets aside a small percentage of earned income for social welfare programs. Typically, payroll taxes will deduct a total of 15% from an employee’s gross earnings, with about 12% dedicated to Social Security and 3% dedicated to Medicare.
Certain states, including Washington, may have additional payroll taxes for Paid Family Leave and other programs.
How Often Do Small Businesses Need to Pay Taxes?
Unlike individual taxpayers who will only need to file personal taxes during tax season (typically between January and April each year), most business owners will need to file taxes year-round. A small business owner is responsible for filing quarterly tax returns with the IRS to keep track of various income and payroll taxes.
Can a Small Business Take Tax Deductions?
Small business owners can take several deductions on each tax return. The most common deductions include home office expenses, business vehicle and travel expenses, organization start-up expenses, utilities and office rentals, and health insurance premiums.
It’s important to work with a tax advisor to identify the best deductions for a small business or other business structure, since this can reduce owed taxes on each annual return.
What Taxes Do You Owe If You Are Self-Employed?
For a business that qualifies as a sole proprietorship, there are several self-employment taxes that need to be filed each year. Self-employed individuals are taxed at a rate of roughly 15% and will owe taxes for both Social Security and Medicare.
All combined wages over $147,000 are subject to this tax obligation. That said, a self-employed individual will be eligible for business tax deductions, including deductions for health insurance.
Does Your Organization Need to File a Return Even If You Don’t Owe Taxes?
Even if you don’t think your business will owe any taxes, it’s best to play it safe and file annual or quarterly returns accordingly. For a small business owner who paid more in estimated taxes, a tax refund will be issued when a return is filed with the IRS.
What Are Installment Agreements for a Small Business?
The IRS offers payment plans for companies to get back on track. The most common plan is the In-Business Trust Fund Express Installment Agreement (IBTF-Express IA), an installment agreement ideal for companies that owe less than $25,000.
Do You Need to Provide Financial Information?
If you need to apply for the IBTF-Express IA, then you will not need to provide any financial statements on your application. The IRS does not institute any financial verification for a business that owes less than $25,000.
How Does a Business Qualify?
To qualify for this installment agreement, you must agree to make monthly payments with a direct debit installment agreement. You must also agree that your company will pay off the debt within 24 months or by the end of the Collection Statute Expiration Date. Your company must be in compliance with all current tax filings, as well.
For companies that do not qualify for this installment agreement because the tax debt is too great, it will be necessary to hire a tax pro to help establish a payment arrangement with the IRS. A business tax attorney will help a business entity file Form 433-B CIS for Businesses to open a case with a Field Collection Revenue Officer to determine the best method of settling tax debt.
How Can a Small Business Tax Lawyer Help?
In general, it’s wise for a business owner to enlist the help of a business tax attorney for general tax planning and other issues related to tax law. Business tax attorneys have special education in taxation and can assist with crucial business decisions. Aside from working with an attorney to create an installment agreement with the IRS, a small business tax lawyer can also help your company avoid red flags that may result in tax penalties.
Business tax lawyers are one of the most reliable ways to create a tax plan for tax deductions, tax preparation, and other guidance. An attorney can help design a business framework, particularly when it’s time to create the legal and tax structure for your business. If necessary, a tax attorney can also provide legal representation if you are facing penalties with the IRS.
What Are the Tax Obligations for Different Business Structures?
Different business structures will have different tax obligations. It’s important to keep these obligations in mind when you are working with a tax professional, since this part of tax planning will help you file the appropriate tax returns at the right time.
A sole proprietorship is an organization that is owned and operated by a single individual, and this self-employment situation generally means that all business income will be reported on annual personal tax returns. A sole proprietor is responsible for paying a self-employment tax but will not have to comply with a business tax rate.
An LLC is similar to a sole proprietorship because all income earned under an LLC (limited liability company) is considered personal income. Although an LLC will have the benefit of liability protection, all income must be reported on annual tax returns with the appropriate forms.
Corporations typically have the most complex business structure and tax obligations. In addition to federal and state income tax, a corporation will also need to pay payroll taxes for all employees. If the owner of a corporation chooses to pay themselves with profits from the business, then personal taxes such as FICA will also need to be paid annually.
What Other Tax Professionals Should Small Businesses Hire?
Aside from a business tax attorney, there are other tax professionals business owners may want to hire. A CPA (certified public accountant) can be vital for disseminating tax advice about record-keeping and other accounting needs. Many CPAs will also have knowledge about the current tax code that applies to your business structure, including deductions your organization may qualify for.
For business owners who aren’t sure which tax pro to hire, resources such as the National Association of Enrolled Agents can identify certified public accountants and other tax advisors in the area. CPA societies and local BAR associations also have agents with specific knowledge about business tax issues.
What Are the Consequences of Ignoring the IRS?
If you receive a notice from the IRS about tax owed by your business, it’s important to contact a certified public accountant, tax attorney, or another tax pro as soon as possible. Ignoring the IRS has serious consequences that may result in losing your business, business assets, or even your personal property.
If the IRS determines that you owe small business taxes, it’s likely the IRS will order an audit. IRS audits will look at the accounting information for your business and your recent tax filings, which is why record-keeping is so essential. When you work with a tax professional, you can feel more confident about weathering an IRS audit.
An organization that has fallen behind on estimated taxes may face penalties such as interest charges. The current interest rate on business tax debt is about 14%, but interest charges aren’t fixed and may increase the longer a small business tax is unpaid.
In some cases, the IRS may file a levy against your organization’s properties or assets to incentivize payments. The IRS has the right to seize assets such as your bank account, personal home, and your wages. Working with a tax law expert can help you protect your assets while you are making payment arrangements with the IRS.
Businesses need to work with a tax professional or tax advisor to avoid penalties for underpaying taxes. Both certified public accountants and business tax lawyers can provide important legal information and other tax advice to optimize the tax strategy for your organization. Reach out to Seattle Legal Services, PLLC at 206-895-7268 today.