Business Tax

There are various federal taxes that may apply to your small business. The type and form of business you operate determines what taxes you must pay and how you pay them. At the federal level, several different taxes may apply.

Excise Taxes

The IRS defines an excise tax as a tax imposed on the sale of specific goods or services, or on certain uses. Federal excise tax is typically imposed on the sale of items such as tobacco, fuel, alcohol, tires, heavy trucks and highway tractors, and airline tickets. Many excise taxes are placed in trust funds for projects related to the taxed product or service, such as highway or airport improvements.

An excise tax may be imposed at the time of import, sale by the manufacturer, sale by the retailer, or use by the manufacturer or consumer. Some excise taxes are collected by a third party, which then must remit the taxes to the IRS in a timely manner. An example of a third-party collector of an excise tax is a commercial airline, which collects the excise taxes on airline tickets that are paid by airline passengers. Businesses that are subject to federal excise taxes must generally file Form 720, Quarterly Federal Excise Tax Return. Certain excise taxes, such as those owed to the Alcohol and Tobacco Tax and Trade Bureau, are reported on different forms.

Income Taxes

Income taxes must be paid on business profits. How that tax is paid depends on how the business is structured. Most small businesses are pass-through entities, which means that the business’s profits or losses are passed through to the owners and reported on their personal income tax returns.

Partnerships and multi-member limited liability companies (LLCs) generally file a partnership business tax return for informational purposes only. The individual partners and LLC members pay income taxes for their share of the income of the business. Note, however, that some LLCs elect to be treated as a corporation for tax purposes.

An S corporation files an S corporation income tax return for the business. Like a partnership, an S corporation’s net income is divided among the owners, who pay tax on their share of that income individually.

A sole proprietor reports business profit or loss on a separate schedule filed with the sole proprietor’s individual income tax return. Unless an election to be treated as a corporation has been made, the owner of a single-member LLC also reports the company’s profit or loss directly on the owner’s return.

Social Security and Medicare Taxes

Employers must generally withhold Social Security and Medicare taxes from their employees’ wages and must pay a matching amount. Employers must also withhold the 0.9% additional Medicare tax on employee wages and compensation that exceeds a threshold amount.

Self-Employment Taxes

Self-employment tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes paid for other workers.

Federal Unemployment Tax

Employers are required to report and pay the Federal Unemployment Tax Act (FUTA) tax separately from federal income taxes and Social Security and Medicare taxes. FUTA tax is not withheld from wages; employers are responsible for paying the tax.

Business owners should exercise extreme care when it comes to paying taxes since any mistakes on their part could result in significant penalties. For assistance, consult a tax professional.

It’s not just self-employed individuals who must pay estimated taxes. Here’s what you need to know.

W-2 income tax withholding isn’t perfect. You’ve probably had years when you owed more than you expected to on April 15. Or you were pleasantly surprised to receive a sizable refund. The idea, of course, is to try to come out as even as possible. You can usually do this by adjusting your withholding when you experience a life change like taking on a mortgage or having a baby.

Income taxes are also pay-as-you-go for self-employed individuals – or at least they should be. If you’re striking out on your own by starting your own small business in 2022 or you’re simply taking on a side gig to improve your finances, your tax obligation will change dramatically. Your income will not be subject to employer withholding every week or two. In most cases, you’ll get it all. But the IRS expects you to pay estimated taxes on that income four times a year.

Who Else Must Pay?

There are other situations where you’ll be expected to make quarterly payments. In fact, the only individuals who aren’t required to pay estimated taxes (besides W-2 employees whose withholding is on target) are those who meet all three of these conditions:

• You owed no taxes the previous tax year (line 24 on your 2021 1040—total tax—is zero, or you weren’t required to file a return).
• You were a resident alien or U.S. citizen for all of 2021.
• Your 2021 tax year covered a 12-month period.

You’ll find your total tax for 2021 on line 24 of the Form 1040. Notice, too, that line 26 asks for 2021 estimated tax payments.

There are numerous situations where individuals who have payroll taxes regularly withheld on their income may still be required to submit quarterly estimated taxes. For example, did you receive income from rents or royalties? Dividends or interest? Income from selling an asset? Gambling?

If you have an employer who withholds taxes, but you don’t think you’ll be paying enough given the deductions and credits you might receive, you need to plan for estimated taxes. Self-employed individuals are almost always required to submit them.

Special Rules for Some

As with all things IRS, there are many exceptions to the rules regarding estimated taxes. For example, there are special rules for:

• Fishermen and farmers.
• Some household employers.
• Certain high-income taxpayers.
• Nonresident aliens.

How Do You Estimate Your Quarterly Taxes?

That’s the hard part, especially if you’re new to the world of estimated taxes. There is no magic formula, no way to calculate to the penny what you’ll owe. You’re basically making an educated guess. Since you won’t know for sure what changes to the tax code will be put in place until the end of the year, you can’t be absolutely certain that you might get a particular credit or deduction.

But you know roughly what your income will be for a given quarter once you’re nearing the end of it. Do you have a lot of business-related expenses? Keeping track of those is critical, as they’ll offset your income. If you don’t, you’ll have to budget for a heftier quarterly payment. And you must keep in mind that you’ll be paying self-employment tax – that portion of your income taxes that your employer used to pay.

Once you’ve been self-employed for a full tax year and have seen what your tax obligation was, it will be easier to estimate in subsequent years. But you may have a difficult time your first year.

How Do You Pay Estimated Taxes?

Individuals and business that had to pay estimated taxes in 2021 submitted the Form 1040-ES four times. If you’re self-employed in 2022, you’ll need to submit similar vouchers with your payments, unless you’re paying online.

If you’re self-employed and you anticipate owing $1,000 or more in taxes on your 2022 income, you’ll need to file quarterlies using IRS Form 1040-ES vouchers (available on the IRS website) along with a check or money order. There are also ways to pay online using a credit or debit card or direct bank withdrawal. Corporations would file the Form 1120-W if they expect to owe $500 or more.

Estimated taxes for the 2022 tax year are due:

April 18, 2022 (January 1-March 31, 2022)

June 15, 2022 (April 1-May 31, 2022)

September 15, 2022 (June 1- August 31, 2022)

January 16, 2023 (September 1-December 31, 2022)

A Challenging Task

Estimated taxes are not precise. And it may be difficult to set aside money for them if your income is not where you’d like it to be. But as you might expect, the IRS will levy penalties on you if you don’t.

Year-round tax planning can help you in this critical area. We’ll be happy to set aside time to consult with you about estimated taxes. We’re also available to do tax preparation and to look at how your taxes fit into your overall financial situation. Contact us soon to get a jump on the 2022 tax season — or to finish up 2021.

Small businesses benefit from various tax credits that reduce the amount of tax they pay to the government. Here, we discuss tax credits, why they exist and provide a list of the top tax credits that small business owners should know.

Small Business Tax Credits

A small business tax credit is an amount of money subtracted from the taxes the business owes. Tax credits differ from tax deductions. For example, deductions cut a business’ total tax by a percentage of the deduction, depending on the tax bracket. Alternatively, tax credits reduce the tax due, not the amount of taxable income. In other words, a small business tax credit is a dollar for dollar deal – every dollar of credit cuts the business’ tax by a whole dollar. This credit is a significant benefit for small business owners because it helps recover some operating costs and retains the precious capital needed for growth.

As a practical example, if your business owes $20,000 in taxes, but you can claim a $5,000 tax credit, that amount is subtracted from your total tax bill making the new tax bill $15,000.

The Purpose of Small Business Tax Credits

The U.S. government grants tax credits to promote behaviors it finds favorable. For example, tax credits are offered to businesses as incentives for activities that benefit employees, promote specific industries, or aid or benefit society. One example is the government offering tax credits to businesses that purchase electric vehicles. The government encourages this to fight climate change and global warming. Because tax credits can have such a dramatic impact on a small business’s bottom line, it is crucial to stay apprised of tax credits for which your business is eligible.

7 Small Business Tax Credits for 2021

In the wake of the COVID-19 pandemic, related tax credits for small businesses top the list.

1. Employee Retention Credit

Under the American Rescue Plan, the Employee Retention Credit (ERC) is extended for small businesses through December 2021 and is available for all four quarters of the year. This tax credit allows small businesses to offset payroll tax liabilities by up to $7,000 per employee per quarter. That means a credit of up to $28,000 per employee is available for small businesses whose revenue declined due to the COVID-19 pandemic. A 20 percent decline in gross receipts during a single quarter makes a business eligible for this tax credit.

2. Paid Leave Credit

Another tax credit that falls under the American Rescue Plan is the Paid Leave Credit. This credit is extended through September 30, 2021, and offers credits for small and midsize businesses that offer paid leave to employees for COVID-related illness, quarantine, or family caregiving. The allowable credit is equal to wages up to $5,000 of paid leave for sick or quarantining employees.

Note: Small businesses are no longer required by law to offer paid leave related to COVID; however, if they do, the credit still applies.

Other tax credits of which small businesses should be aware are:

3. Health Care Tax Credit

With the Health Care Tax Credit, the smaller the business, the bigger the credit. The credit is highest for businesses with fewer than ten employees. Generally, the way to qualify for the credit is by enrolling in a Small Business Health Options Program (SHOP).

A business must meet the following requirements to qualify:

• (a) have fewer than 25 full-time employees,
• (b) have an average employee salary of approximately $50,000 per year or less,
• (c) pay at least 50 percent of full-time employees’ healthcare premiums, and
• (d) offer SHOP coverage to all full-time employees.

This credit can be claimed for two consecutive years, applicable from 2017 forward.

4. Work Opportunity Credit

This credit is available to employers who hire from specific groups that face barriers to employment. For example:

• Qualified IV-A Recipient – receiving TANF assistance
• Qualified Veteran – the IRS provides details of what “qualified” entails on their site under Tax Credits
• Ex-Felon
• Designated Community Resident (DCR) – between 18 and 40 years old and living in an empowerment zone, an enterprise community, or a renewal community
• Vocational Rehabilitation Referral – a person who has a physical or mental disability and has been referred to the employer while receiving or upon completion of rehabilitative services
• Summer Youth Employee
• Supplemental Nutrition Assistance Program (SNAP) Recipient
• Supplemental Security Income (SSI) Recipient
• Long-Term Family Assistance Recipient
• Qualified Long-Term Unemployment Recipient

Under the Consolidated Appropriation Act, 2021, this credit was extended until December 31, 2025.

5. Disabled Access Credit

Eligible small businesses that earn $1 million or less and have a maximum of 30 full-time employees in a year can claim this credit each year in which expenditures are incurred to make their business accessible to persons with disabilities under the Americans with Disabilities Act (ADA).

Expenditures include, but are not limited to, installing wheelchair ramps, upgrading restrooms, and providing Braille text materials.

6. Employer-Provided Childcare Facilities and Services

While few businesses these days seem to provide in-house child care for their employees’ children, a tax credit can make this an attractive option. This credit is a general business tax credit for 25 percent of qualified employer-provided child care expenditures plus 10 percent of qualified child care resources and referral expenditures. The credit is capped at $150,000 per tax year.

Qualifying expenditures:

• Include operating costs of a qualified child care facility
• Include costs for acquisition, construction, rehabilitation, or expansion of a property used as a care facility (but not land or any part of the principal residence of the taxpayer)
• May not exceed the fair market value of care provided

The employer-run facility must open enrollment to employees and must not discriminate in favor of highly compensated employees. At least 30 percent of the facility’s enrollment must consist of dependents of taxpayer employees.

7. Research and Development (R&D) Tax Credits

Several R&D tax credits exist for small businesses. These credits typically apply to science, medical and technology-based businesses; however, many businesses engage in qualified R&D activity.

The following activities qualify for an R&D tax credit:

• New prototype or model development
• Proprietary product on which you seek a patent
• Developing a new manufacturing process or business process
• Improving product efficiency or existing business processes
• Improving quality control processes
• Environmental or certification testing

Businesses that qualify for this credit can subtract up to 10 percent of R&D costs from their tax bill.

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Ask your tax professional about small business tax credits that apply to your business. There are additional federal small-business tax credits from state and local governments. Tax credits often expire after a few years, so act quickly to take advantage of those that apply to you.

The distinction may be challenging to make sometimes, but the IRS has very strict rules about it.

Depending on the size of your business, onboarding a new hire can involve a lot of reading and writing for both of you. You may want the new worker to fill out a personal profile. There could be a company handbook for the individual to read and detailed job specifications and a contract to absorb. And tax forms.

But which tax forms? That depends entirely on whether your new staff member is an independent contractor or an employee. The distinction involves more complex issues than their actual physical work location (your office or elsewhere) and their schedule (full-time 9-5 or an odd assortment of part-time hours).

The IRS takes this distinction very seriously. So seriously, in fact, that it’s been known to do lengthy investigations of large companies to determine whether staff members are being classified correctly.

You’ll need to determine whether workers are employees or independent contractors, so you know which tax form to send in January, a 1099-NEC or a W-2.

Three Factors

If you’re hoping for a magic formula that will help you make this determination, you’re not going to get one from the IRS. The agency does lay out the factors it looks at, but they’re somewhat murky. You have to look at three different elements of the relationship between management and workers as you try to make this call. They are:

• Behavioral. How do the workers do their jobs, and what do they actually do? Does the boss control this or the employee/contractor?
• Financial. Do workers pay for their own computers and smartphones and the other supplies and tools required to do their jobs, or does management? How are individuals paid? Are their expenses reimbursed? You’ll need to look at various aspects of the business relationship.
• Type of relationship. Will this be an ongoing relationship? Are there “extras” involved besides basic compensation, like employee benefits (health insurance, retirement plans, etc.) and written contracts? Will the new staff member be providing a work product that is a “key aspect of the business?”

What you’re looking closely at here is control. How much control does the boss have over employees or independent contractors?

You may get frustrated as you try to answer these questions. It may seem that some of your answers would indicate that the individual is an independent contractor, while others point to employee status. You might also discover that some of the individual’s work and workdays fit one definition while other work would indicate the other.

Like we said earlier, there’s no magic formula you can use to make this determination.

A Helpful IRS Form

If you absolutely can’t determine whether an individual is an employee or independent contractor, you can try to get help from the IRS by completing a Form SS-8.

You may find that you simply can’t make a determination based on how the IRS wants you to define your relationship with a specific worker. If that’s the case, you can complete and submit the multi-page IRS Form SS-8: Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. This may help, but unfortunately, it takes roughly six months for the IRS to respond to your query. It may even take longer considering the slowdowns caused by the COVID-19 pandemic.

You’ll also have to contact your state’s labor office because each state has its own criteria for determining a worker’s status based on unemployment insurance and workers’ compensation laws. In addition to the questions the IRS poses, some states ask you to consider how economically dependent the person is on your business. Go to this page to find contact information for your own state’s labor offices.

Help With Onboarding?

If you’re in the process of hiring a new staff member or plan to during 2021, keep in mind that you’ll need to know immediately which IRS tax form you need to have them complete before you pay them for the first time. An independent contractor will get a W-9 (usually no taxes withheld) and an employee, a W-4 (taxes withheld).

Hiring an independent contractor is generally fairly easy. They usually send you invoices for their work. You pay them, and they’re responsible for their own income taxes. Onboarding an employee, however, is a more complex process, primarily because of the income tax piece. We encourage you to contact us if you’re having trouble distinguishing between employees and contractors and/or if you’d like help dealing with taxes for a new hire. We’ve worked with other small businesses in this area, and we’d be happy to assist you.

Eligible small employers who provide health care coverage to their employees can receive a Small Business Health Care Tax Credit from the Federal government. Here’s what you need to know about who qualifies and how to take advantage of the credit.

What is the Small Business Health Care Tax Credit?

Small business owners make numerous decisions about employee benefits. For example, the type of benefits offered can entice the most desirable candidates to apply for their company’s positions. The right type of benefits can also boost employee retention. An excellent employee benefit to consider is health insurance. If that’s a perk being offered, the small business health care tax credit is a feature of the Affordable Care Act (ACA) that may be of interest. The tax credit is limited to employers with less than 25 employees, and it operates as a sliding-scale credit based on the size of the employer. The larger the employer, the smaller the tax credit. The maximum credit is 50 percent of premiums paid (35 percent for tax-exempt employers).

Qualifying small employers can take advantage of the small business health care tax credit for two consecutive tax years providing the business owes no taxes during those years. The credit can also be carried forward or back to other tax years. Any excess amount paid for health insurance premiums over the allowable credit can be claimed as a business expense.

Who qualifies for the Small Business Health Care Tax Credit?

As mentioned above, the small business health care tax credit is for small employers with fewer than 25 full-time equivalent employees (FTE). Note that the FTE concept is based on hours worked rather than the actual number of employees.

Other qualifications include that:

The employer pays less than $50,000 a year per FTE in average wages. Determining FTEs and average annual wages should be done by your qualified tax preparer, CPA, or via guidance from the Internal Revenue Service (IRS).

The employer offers a qualified health plan to employees through a Small Business Health Options Program Marketplace (SHOP).

The employer pays at least 50 percent of the employee’s premium cost. (Not family or dependent premium cost.)

What about Tax-exempt Organizations?

Tax-exempt organizations are also eligible for the small business health care tax credit. In this case, the credit is refundable to the extent that it does not exceed income tax withholdings or Medicare tax liability. Refunds to tax-exempt organizations are reduced by the current fiscal year sequestration rate. For an explanation of sequestration and how it impacts the small business health care tax credit, consult your tax advisor or accountant.

How do small businesses take advantage of the Small Business Health Care Tax Credit?

To claim the small business health care tax credit, the IRS requires Form 8941 (Credit for Small Employer Health Insurance Premiums) to be filled out and submitted. For small businesses, the amount should be included as part of the general business credit on the company’s federal tax return. The amount should be included on Form 990-T (Exempt Organization Business Income Tax Return) for tax-exempt organizations. Note: this form must be filed for a tax-exempt organization to claim the small business health care tax credit, even if the business does not typically file that form.

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Small business owners may find that offering perks like health insurance aren’t beyond their economic reach with incentives like this. As always, a trusted tax professional is the place to turn regarding this and other tax credits for small businesses.

We’ve helped many individuals and businesses reduce their overall tax liability through proper planning. To learn more about our tax planning services, request a free consultation online or give us a call at (336) 354-4352.

Obtaining financing to start or expand small businesses and buy homes can sometimes be difficult. If your child or grandchild is having a hard time getting a loan from a commercial lender, you may be willing to help out by lending the money yourself.

Have a Written Agreement

Start by putting the loan agreement in writing. This may seem like an unnecessary formality, but without a written loan document, the IRS could argue that the transaction was a gift instead of a loan, potentially creating gift tax issues.

Having written documentation is also important in case the borrower fails to repay all or part of the loan. In that situation, you’d want to be able to show you’re entitled to write off the unpaid amount as a nonbusiness bad debt.

Charge Adequate Interest

The second step is setting an interest rate. While there’s no rule against interest-free loans or loans that have below-market interest rates, in a family context they can lead to tax complications. If you don’t charge sufficient interest, the difference between the amount of interest you actually receive (if any) and the amount you should have received — referred to as “imputed” interest — is taxable to you.

You can avoid the imputed interest rules by charging interest at the appropriate “applicable federal rate” (AFR). The IRS publishes AFRs monthly for loans of different maturities. These rates have been relatively low recently, reflecting the current market interest rate environment. For example, in November 2019, the annual AFR (using a monthly compounding assumption) was:

• 1.68% for a short-term loan (three or fewer years)
• 1.59% for a mid-term loan (more than three but no more than nine years)
• 1.94% for a long-term loan (more than nine years)

These are the minimum rates for intra-family loans initiated in November 2019. For a term loan, the rate can remain fixed for the life of the loan. For a demand loan (one that gives you the right to demand full repayment at any time), you have to charge a floating AFR to avoid imputed interest issues.

Exceptions

When you lend your child or grandchild no more than $100,000, the amount that can be added to your taxable interest income under the below-market interest rate rules generally can’t exceed the borrower’s net investment income. Even better, you won’t have to report any imputed interest if the borrower’s net investment income amounts to $1,000 or less. You can also sidestep imputed interest on small loans of no more than $10,000 (all outstanding principal) provided the borrowed funds aren’t used to buy or carry income-producing assets.