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All businesses except partnerships must file an annual income tax return. Partnerships file an information return.
The form you use depends on how your business is organized. The federal income tax is a pay-as-you-go tax. Taxpayers must pay income tax when income is earned or received 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. For additional information refer to Publication 505, Starting a Business and Keeping Records.
Estimated Taxes
Generally, taxpayers must pay taxes on income, including self-employment tax (see below), by making regular payments of estimated tax during the year.
What are Estimated Taxes?
Estimated tax is the method used to pay tax on income that is not subject to withholding. This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough.
Estimated tax is used to pay income tax and self-employment tax, as well as other taxes and amounts reported on your tax return. If you do not pay enough through withholding or estimated tax payments, you may be charged a penalty. If you do not pay enough by the due date of each payment period you may be charged a penalty, even if you are due a refund when you file your tax return.
Who Must Pay Estimated Tax?
If you had a tax liability for 2006, you may have to pay estimated tax for 2007.
General Rule—taxpayer must pay estimated tax for 2007 if both of the following apply:
1. You expect to owe at least $1000 in tax for 2007 after subtracting withholding and credits
2. You expect your withholding and credits to be less than the smaller of:
• 90% of the tax to be shown on your 2007 tax return, OR
• 100% of the tax shown on your 2006 tax return (2006 tax return must cover all 12 months)
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 additional information, refer to 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. For additional information, refer to Publication 542, Corporations.
Who Does NOT Have To Pay Estimated Tax?
If you receive salaries and wages, you can avoid having to pay estimated tax by asking your employer to take more tax out of your earnings. To do this, file a new Form W-4 with your employer.
Estimated Tax NOT Required:
You do not have to pay estimated tax for 2007 if you meet all three of the following conditions:
• you have no tax liability for 2006
• you were a US citizen or resident for the whole year
• your 2006 tax year covered a 12-month period
You had no tax liability for 2006 if your total tax was zero or you did not have to file an income tax return. For additional information on how to figure your estimated tax, refer to Publication 505, Tax Withholding and Estimated Tax.
How To Figure Estimated Tax
To figure your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for this year. When figuring your 2007 estimated tax, it may be helpful to use your income, deductions, and credits for 2006 as a starting point. Use your 2006 federal tax return as a guide. You can use Form 1040-ES to figure your estimated tax. You must make adjustments both for changes in your own situation and for recent changes in the tax law.
When To Pay Estimated Taxes
For estimated tax purposes, the year is divided into four-payment periods. Each period has a specific payment due date. If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty, even if you are due a refund when you file your income tax return.
Using the Electronic Federal Tax Payment System (EFTPS) system is the easiest way to pay your federal taxes for individuals, as well as businesses. Make all of your federal tax payments including federal tax deposits (FTD’s), installment agreements, and estimated tax payments using the EFTPS.
Self-Employment Tax
Self-employment tax is a Social Security and Medicare tax primarily for individuals who work for themselves. Taxpayer payments of self-employment tax contribute to coverage under the social security system. Social Security coverage provides taxpayers with retirement benefits, disability benefits, survivor benefits, and hospital insurance benefits.
Generally, you must pay self-employment tax and file Schedule SE (Form 1040) if either of the following applies.
• if your net earnings from self-employment were $400 or more, or
• if you are an employee of a church or a qualified church-controlled organization (other than as a minister or member of a religious order) that elected an exemption from Social Security and Medicare taxes, you are subject to self-employment tax if you receive $108.28 or more in wages from the church or organization.
Note—a taxpayer can deduct half of their self-employment tax in figuring adjusted gross income. Wage earners cannot deduct Social Security and Medicare taxes.
Self-employment tax rate—self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for Social Security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).
Maximum earnings subject to self-employment tax—only the first $94,200 of your combined wages, tips, and net earnings in 2006 is subject to any combination of the 12.4% social security part of the self-employment tax or Social Security tax. All your combined wages, tips, and net earnings in 2006 are subject to any combination of the 2.9% Medicare part of the self-employment tax or Social Security tax.
Fiscal year filer—if you use a tax year other than the calendar year, you must use the tax rate and maximum earnings limit in effect at the beginning of your tax year. Even if the tax rate or maximum earnings limit changes during your tax year, continue to use the same rate and limit throughout your tax year.
Self-employment tax deduction—you can deduct half of your self-employment tax in figuring your adjusted gross income. This deduction only affects your income tax. It does not affect either your net earnings from self-employment or your self-employment tax.
How to Pay Self-Employment Tax?
To pay self-employment tax, you must have a social security number (SSN) or an individual taxpayer identification number (ITIN). This section explains how to:
• obtain an SSN or ITIN (Individual Taxpayer Identification Number)
• pay your self-employment tax using estimated tax
Obtaining a Social Security Number—if you never had an SSN, apply for one using Form SS-5, Application for a Social Security Card. You can get this form at any Social Security office or by calling (800) 772-1213. Download the form from the Social Security website.
Employment Taxes
Note—before you become an employer and hire employees, you need a Federal Employer Identification Number (EIN).
If you have employees, you are responsible for several federal, state, and local taxes. As an employer, you must withhold certain taxes from your employees’ pay checks. Employment taxes include the following:
1. Federal income tax withholding
2. Social Security and Medicare taxes
3. Federal Unemployment (FUTA) Tax
Federal Income Taxes, Social Security, and Medicare Taxes
You generally must withhold federal income tax from your employees’ wages. To figure how much to withhold from each wage payment, use the employee's Form W-4 and the methods described in Publication 15, Employers Tax Guide and Publication 15-A, Employers Supplemental Tax Guide.
Social security and Medicare taxes pay for benefits that workers and 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 of FICA. You withhold part of these taxes from your employee's wages and you pay a matching amount yourself.
Which form do I file to report Federal Income Taxes, Social Security, and Medicare taxes?
• Form 941, Employer's Quarterly Federal Tax Return
• Form 943, Employer's Annual Federal Tax Return for Agriculture 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. Report FUTA taxes on Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return.
Depositing Taxes
In general, you must deposit income tax withheld and both the employer and employee social security and Medicare taxes (minus any advance EIC payments) by mailing or delivering a check, money order, or cash to a financial institution that is an authorized depositary for Federal taxes. You can make your deposits either electronically, using the Electronic Federal Tax Payment System (EFTPS), or by taking your deposit and Form 8109-B, Federal Tax Deposit Coupon to an authorized financial institution or a Federal Reserve bank serving your area. However, some taxpayers are required to deposit using the EFTPS. And to encourage prompt payment of withheld income and employment taxes, including Social Security taxes,
railroad retirement taxes, or collected excise taxes, Congress passed a law that provides for Trust Fund Taxes (TFRP). These taxes are called trust fund taxes because you actually hold the employee's money in trust until you make a federal tax deposit in that amount.
Certain Taxpayers May File Employment Taxes Annually
To reduce burden for certain small business taxpayers, employers who have an employment tax liability of $1,000 or less for the year will now file Form 944, Employer’s Annual Federal Tax Return, instead of Form 941, Employer’s Quarterly Federal Tax Return. Eligible taxpayers will be notified by mail.
Recordkeeping for Employers
Keep all records of employment taxes for at least four years. Also, keep good records for your business to help you monitor the progress of your business, prepare your financial statements, identify source of receipts, keep track of deductible expenses, prepare your tax returns, and support items reported on tax returns. |
Federal Business Taxes 
