Publication 583
Starting a Business and Keeping Records
(Revised: 5/2002)

Business Taxes

The form of business you operate determines what taxes you must pay and how you pay them. The following are the four general kinds of business taxes.

• Income tax.
• Self-employment tax.
• Employment taxes.
• Excise taxes.

See Table 2 on page 6 for the forms you file to report these taxes.

You may want to get Publication 509. It has tax calendars that tell you when to file returns and make tax payments.

Income Tax

All businesses except partnerships must file an annual income tax return. Partnerships file an information return. Which form you use depends on how your business is organized. See Table 2 to find out which return you have to file.

The federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year. An employee usually has income tax withheld from his or her pay. If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax. If you are not required to make estimated tax payments, you may pay any tax due when you file your return.

Estimated tax.   Generally, you must pay taxes on income, including self-employment tax (discussed next), by making regular payments of estimated tax during the year.

Sole proprietors, partners, and S corporation shareholders.   You generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return. Use Form 1040-ES, Estimated Tax for Individuals, to figure and pay your estimated tax. For more information, see Publication 505, Tax Withholding and Estimated Tax.

Corporations.   You generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more when you file its return. Use Form 1120-W, Estimated Tax for Corporations, to figure the estimated tax. You must deposit the payments as explained on page 8 under Depositing Taxes. For more information, see Publication 542.

Self-Employment Tax

Self-employment tax is a social security and Medicare tax primarily for individuals who work for themselves. Your payments of self-employment tax contribute to your coverage under the social security system. Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.

You must pay self-employment tax if either of the following applies.

1. Your net earnings from self-employment (excluding church employee income) were $400 or more.
2. You had church employee income of $108.28 or more.

Use Schedule SE (Form 1040) to figure your self-employment tax. For more information, see Publication 533, Self-Employment Tax.

You can deduct one-half of your self-employment tax as an adjustment to income on your Form 1040.

The Social Security Administration (SSA) time limit for posting self-employment income.   Generally, the SSA will give you credit only for self-employment income reported on a tax return filed within 3 years, 3 months, and 15 days after the tax year you earned the income. If you file your tax return or report a change in your self-employment income after this time limit, the SSA may change its records, but only to remove or reduce the amount. The SSA will not change its records to increase your self-employment income.

Employment Taxes

This section briefly discusses the employment taxes you must pay, the forms you must file to report them, and other forms that must be filed when you have employees.

Employment taxes include the following.

• Federal income tax withholding.
• Social security and Medicare taxes.
• Federal unemployment (FUTA) tax.

If you have employees, you will need to get Publication 15, Circular E, Employer's Tax Guide. If you have agricultural employees, get Publication 51, Circular A, Agricultural Employer's Tax Guide. These publications explain your tax responsibilities as an employer.

If you are not sure whether the people working for you are your employees, see Publication 15-A, Employer's Supplemental Tax Guide. That publication has information to help you determine whether an individual is an employee or an independent contractor. If you classify an employee as an independent contractor, you can be held liable for employment taxes for that worker plus a penalty. An independent contractor is someone who is self-employed. You do not generally have to withhold or pay any taxes on payments to an independent contractor.

Federal Income, Social Security, and Medicare Taxes

You generally must withhold federal income tax from your employee's wages. To figure how much federal income tax to withhold from each wage payment, use the employee's Form W-4 (discussed later under Hiring Employees) and the methods described in Publication 15.

Social security and Medicare taxes pay for benefits that workers and their families receive under the Federal Insurance Contributions Act (FICA). Social security tax pays for benefits under the old-age, survivors, and disability insurance part of FICA. Medicare tax pays for benefits under the hospital insurance part. You withhold part of these taxes from your employee's wages and you pay a matching amount yourself. To find out how much social security and Medicare tax to withhold and to pay, see Publication 15.

Which form do I file?   Report these taxes on Form 941, Employer's Quarterly Federal Tax Return. (Farm employers use Form 943, Employer's Annual Tax Return for Agricultural Employees.)

Federal Unemployment (FUTA) Tax

The federal unemployment tax is part of the federal and state program under the Federal Unemployment Tax Act (FUTA) that pays unemployment compensation to workers who lose their jobs. You report and pay FUTA tax separately from social security and Medicare taxes and withheld income tax. You pay FUTA tax only from your own funds. Employees do not pay this tax or have it withheld from their pay.

Which form do I file?   Report federal unemployment tax on Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return. Or, if you qualify, you can use the simpler Form 940-EZ instead. See Publication 15 to find out if you can use this form.

Hiring Employees

When hiring employees, have them fill out Form I-9 and Form W-4. If your employees qualify for advance payments of the earned income credit, they also must give you a Form W-5.

Form I-9.   You must verify that each new employee is legally eligible to work in the United States. Both you and the employee must complete the Immigration and Naturalization Service (INS) Form I-9, Employment Eligibility Verification. You can get the form from INS offices or from the INS web site at www.ins.usdoj.gov. Call the INS at 1-800-375-5283 for more information about your responsibilities.

Form W-4.   Each employee must fill out Form W-4, Employee's Withholding Allowance Certificate. You will use the filing status and withholding allowances shown on this form to figure the amount of income tax to withhold from your employee's wages.

Form W-5.   An eligible employee who has a qualifying child is entitled to receive advance earned income credit (EIC) payments with his or her pay during the year. To get these payments, the employee must give you a properly completed Form W-5, Earned Income Credit Advance Payment Certificate. You are required to make advance EIC payments to employees who give you a completed and signed Form W-5. For more information, see Publication 15.

Wage Reporting - Form W-2

After the calendar year is over, you must furnish copies of Form W-2, Wage and Tax Statement, to each employee to whom you paid wages during the year. You must also send copies to the Social Security Administration. See Information Returns, later, for more information on Form W-2.

Excise Taxes

This section describes the excise taxes you may have to pay and the forms you have to file if you do any of the following.

• Manufacture, sell, or use certain products.
• Operate certain kinds of businesses.
• Receive payment for various kinds of services and facilities.

For more information on excise taxes, see Publication 510.

Form 720.   The federal excise taxes reported on Form 720, Quarterly Federal Excise Tax Return, consist of several broad categories, including the following taxes.

• Environmental taxes.
• Communications and air transportation taxes.
• Fuel taxes.
• Tax on the first retail sale of heavy trucks, trailers, and tractors.
• Luxury tax on passenger cars.
• Manufacturers' taxes on the sale or use of a variety of different articles.

Form 2290.   There is a federal excise tax on certain trucks, truck tractors, and buses used on public highways. The tax applies to vehicles having a taxable gross weight of 55,000 pounds or more. Report the tax on Form 2290, Heavy Highway Vehicle Use Tax Return. For more information, see the instructions for Form 2290.

Form 730.   If you are in the business of accepting wagers or conducting a wagering pool or lottery, you may be liable for the federal excise tax on wagering. Use Form 730, Monthly Tax on Wagering, to figure the tax on the wagers you receive.

Form 11-C.   Use Form 11-C, Occupational Tax and Registration Return for Wagering, to register for any wagering activity and to pay the federal occupational tax on wagering.

ATF forms.   If you produce, sell, or import guns, tobacco, or alcohol products, or if you manufacture equipment for their production, you may be liable for one or more excise taxes. Report these taxes on forms filed with the Bureau of Alcohol, Tobacco, and Firearms (ATF). For more information, call the ATF National Revenue Center at 1-800-398-2282 or see the ATF web site at www.atf.treas.gov.

Depositing Taxes

You generally have to deposit employment taxes, certain excise taxes, corporate income tax, and S corporation taxes before you file your return.

Mail or deliver deposits with completed deposit coupons to an authorized financial institution unless you make the deposits electronically, as discussed later.

To be on time, mailed deposits must arrive at the depositary by the due date. You may be charged a penalty for not making deposits when due, unless you have reasonable cause. See Penalties, later.

To help ensure proper crediting of your account, include the following on your check or money order.

• Your EIN.
• Type of tax.
• Tax period for the payment.

Deposit coupons.   Use Form 8109, Federal Tax Deposit Coupon, to deposit taxes. On each coupon, you must show the deposit amount, the type of tax, the period for which you are making a deposit, and your telephone number. Use a separate coupon for each tax and period. You must include a coupon with each deposit you make.

Five to six weeks after you receive your employer identification number (EIN), as discussed earlier, the IRS will send you a coupon book. If you have a deposit due and there is not enough time to obtain a coupon book, you can get a blank coupon (Form 8109-B) by calling 1-800-829-1040.

If you have not received your EIN and must make a deposit, mail your payment with an explanation to the Internal Revenue Service Center where you file your return. Make your check or money order payable to the United States Treasury. On the payment, write your name (exactly as shown on Form SS-4), your address, the kind of tax, the period covered, and the date you applied for an EIN. Do not use Form 8109-B in this situation.

Electronic deposit of taxes.   Generally, taxpayers whose total deposits of social security and Medicare taxes and withheld income tax during previous years exceeded certain amounts are required to deposit taxes through the Electronic Federal Tax Payment System (EFTPS).

Taxpayers not required to make deposits by EFTPS may enroll in the system, which will allow tax deposits without coupons, paper checks, or visits to an authorized depositary. For more information, see Publication 15.

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