Perhaps the most significant tax issue small business owners face with regard to employees and taxes are the withholdings they are required to make from employee paychecks. Employers are required to withhold federal income taxes from their employees’ paychecks and pay these withholdings directly to the Internal Revenue Service.

The amount to withhold varies from employee to employee, with variables such as the employee’s salary amount, the number of exemptions claimed by employees and their marital status influencing the amount. To help employers calculate how much to withhold, employees are required to fill out W-4 forms to determine how much should be taken out of their checks for federal income taxes.

In addition to income taxes, employers are also required to withhold employee pay for Social Security and Medicare taxes. These taxes are a little easier to calculate, as they are levied at a flat rate of 6.2 percent for Social Security and 1.45 percent for Medicare. (The SS withholding rate was reduced to 4.2 percent for 2011 and extended by two months into 2012. Employers should keep a watch on the actions of the federal government to see what the rate will be moving forward into 2012.)

If you live in a state with an income tax, you will also be required to withhold state income taxes from your employees paychecks. Income tax rates vary from state to state, and your state’s department of revenue is the best place to find more information about how much tax you need to withhold.

In addition to the taxes you withhold from your employees’ checks, you’re also required to make an employer’s contribution to Social Security and Medicare. The employer’s contribution is currently at 6.2 percent for Medicare and 1.45 percent for Medicare. Businesses must also pay state and federal unemployment taxes. State rates vary, but the federal unemployment tax rate is 6.2 percent of the employees’ income. However, employers who pay their state and federal unemployment taxes on time can take a tax credit of up to 5.4 percent of employee pay, making their effective federal unemployment tax rate .8 percent.

Businesses that employ a large number of workers are required to deposit their FICA taxes by using the Electronic Federal Tax Payment System, an online transfer system. This greatly reduces hassles and paperwork for both you and the federal government.

Small businesses that provide health benefits for their employees should be aware of tax deductions they can take. Beginning in 2010, small businesses were permitted to take a tax credit of 35 percent of the premiums they paid to cover employees. The credit is available to businesses that employ 25 workers or fewer where the average wage is $50,000 or less (Deduction rates are smaller for companies with average annual wages of less than 25 percent). Also, to qualify for the credit, employers must pay at least half the premium for their employees’ coverage.

Employee tax cheatsheat

Here’s a quick rundown of the things you must do to comply with most state and federal tax law if you’re operating a business with employees:

- Once you hire employees, you’ll need to report your new hires to your state’s employment office within 20 days of your employees’ start date.

- Make sure your employees are citizens or foreign nationals approved to work in the U.S. by filling out U.S. Citizenship and Immigration Services Form I-9. You can find a copy of this report on the U.S. Citizenship and Immigration Services website.

- Withhold appropriate income and FICA taxes from your employees’ paychecks and submit the taxes to the IRS. IRS Publication 15 can show you how to submit withholdings and is available on the IRS website.

- Withhold state income taxes and deposit them with your state revenue agency.

- Pay the employer’s share of Social Security and Medicare taxes. Employers pay the same share as employees, currently 7.65 percent of wages up to $106,800 and 1.45 percent of wages above that amount.

- Pay unemployment taxes to the IRS. Employers must pay unemployment taxes if they paid more than $1,500 in wages in a calendar year. Also, don’t forget to pay your state unemployment taxes.

- Make sure that you report your employees wages and your withholdings to the Internal Revenue Service by using IRS form W-2.

By making sure that you comply with government regulations regarding employee tax withholdings and other employee tax issues, you can save yourself considerable headaches and your business money in the form of non-compliance penalties.

Because small business is a major engine for job creation, creating two out of every three net jobs over the past 15 years, according to the SBA, it’s little wonder that the government provides substantial tax breaks for entrepreneurs. However, because of the complex and convoluted nature of the U.S. tax code, many small business owners may not be aware of the tax benefits they may be eligible to receive.

The following is a list of some of the most widely available tax credits to small business owners:

New equipment – Purchasing new equipment can create a big tax deduction for your business. Businesses can deduct up to $500,000 in new equipment purchases from their tax bill. Business owners can also take advantage of big depreciation deductions in the first two years after they purchase the equipment.

Automobile expense – Personal automobiles used for business, or business-owned vehicles can provide deductions for the costs of keeping it operational and fueling it.

In general, you can deduct two types of automobile-related expenses, a standard mileage rate or actual expenses. Under the mileage system, you can deduct 51 cents per mile for every mile driven and also deduct tolls and parking costs. With the actual expense method, you can claim deprecation in value and also bills for actual business-related automobile expenses. With either system, it’s important to keep good records of mileage and expenses in case you’re audited.

Start up costs – New business owners can deduct up to $10,000 in capital costs when they start up their business. This deduction can be spread out over five years if it is advantageous to the business owner.

Legal and professional fees – Money you pay to attorneys or accountants can be deducted in the year which they occur. Business owners can also deduct the cost of certain books, such as those that can help you with certain business issues, such as accounting or law.

Interest expenses – If you take out a loan or use a credit card to help finance your business, you can deduct the interest expense from your businesses taxes. Again, it is important to keep financial records and documentation if you intend to use this tax deduction.

Business travel – Trips made for business purposes can have tax deductible expenses. When traveling on business, you can deduct plane fare, hotel accommodations, meals, laundry, communications and some other expenses from your taxes. You can only deduct your expenses or those of employees, however.

Unpaid debts – If a customer does not pay for goods you sold him or her, you can deduct the cost of the product from your taxes. You cannot deduct the cost of services to clients who do not pay their debt to your business, however.

Entertainment – Small business owners can deduct up to half the cost of entertaining business clients or contacts. Business owners should be careful to keep receipts and document who they have with them when they’re entertaining, however. Also be wary of the line between personal and business entertainment expenses, as getting a little careless of the expenses you claim could trigger an audit.

Taxes – There are a number of taxes you can deduct from you federal tax bill. Business owners can deduct sales taxes paid on supplies or equipment, real estate taxes and excise and fuel taxes. Some states allow business owners to deduct their federal tax liability from state income taxes.

Software – Business owners can deduct 100 percent of the cost of new software in the first year after it’s bought, and gradually declining amounts over five years. Because software can be a frequent cost to businesses, as programs are often updated and re-released, taking advantage of this tax break can be a big benefit for small businesses.

As you can see, there are a number of ways you can reduce your tax bill by taking advantage of tax exemptions offered by the government. Keeping accurate, organized records of all your business expenses is key to taking advantage of these deductions, however.

If you’re not confident of your ability to identify these deductions, consult with a professional accountant. They can help find the deductions you’ve earned and greatly reduce your overall tax burden. Remember that tax rules change frequently – sometimes from year to year – so check IRS news and others sources of tax information frequently to see if there are any new opportunities for your business to save tax dollars or any changes that my throw a kink into your operations.

In addition to paying federal income tax, your business will also likely have to pay state income taxes. The type of state income tax your business pays varies according to the legal structure of your business. For example, in many states, sole proprietor and partnership business owners pay individual income taxes on their business’ profits. In businesses with LLC or corporate status, corporate or business tax rates apply, and the owners may also have to pay individual income tax.

For most home-based and small business owners, only the individual income tax rate will apply. These rates are lower than federal income tax rates, and after deductions, may only apply to a very small amount of your small business income.

The following is a list of states and their individual and corporate income tax rates.

State                                                   Individual rates               Corporate rates

Alabama                                                 2 to 5 percent                               6.5 percent

Alaska                                                     None                                              1 to 9.4 percent

Arizona                                                   2.59 to 5.94 percent                   6.968 percent

Arkansas                                                1 to 7 percent                                1 to 6.5 percent

California                                               1 to 9.3 percent                            8.84 percent

Colorado                                                 4.63 percent                                4.63 percent

Connecticut                                            3 to 6.5 percent                          7.5 percent

Delaware                                                2.2 to 6.95 percent                     8.7 percent

Florida                                                    None                                             5.5 percent

Georgia                                                   1 to 6 percent                              6 percent

Hawaii                                                    1 to 11 percent                             4.4 to 6.4 percent

Idaho                                                      1.6 to 7.8 percent                        7.6 percent

Illinois                                                    5 percent                                      9 percent

Indiana                                                   3.4 percent                                  8.5 percent

Iowa                                                        0.36 to 8.98 percent                 6 to 12 percent

Kansas                                                    3.5 to 6.45  percent                   4 percent

Kentucky                                                2 to 6 percent                            4 to 6 percent

Louisiana                                                2 to 6 percent                           4 to 8 percent

Maine                                                      2 to 8.5 percent                        3.5 to 8.93 percent

Maryland                                                2 to 5.5 percent                        8.25 percent

Massachusetts                                       5.3 percent                                8.25 percent

Michigan                                                 4.35 percent                              4.95 percent

Minnesota                                              5.35 to 7.85 percent                 9.8 percent

Mississippi                                             3 to 5 percent                            3 to 5 percent

Missouri                                              1.5 to 6 percent                            6.25 percent

Montana                                             1 to 6.9 percent                              6.75 percent

Nebraska                                            2.56 to 6.84 percent                     5.58 to 7.81 percent

Nevada                                               None                                                 None

New Hampshire                               None*                                               8.5 percent

New Jersey                                        1.4 to 8.97 percent                       9 percent

New Mexico                                     1.7 to 4.9 percent                           4.8 to 7. 6 percent

New York                                         4 to 8.97 percent                            7.1 percent

North Carolina                                6 to 7.75 percent                           6.9 percent

North Dakota                                  1.84 to 4.86 percent                     2.1 to 6.4 percent

Ohio                                                 0.587 to 5.925 percent **            None **

Oklahoma                                       0.5 to 5.50 percent                        6 percent

Oregon                                            5 to 11 percent                                 6.6 to 7.6 percent

Pennsylvania                                 3.07 percent                                    9.99 percent

Rhode Island                                 3.75 to 5.99 percent                       9 percent

South Carolina                              0 to 7 percent                                  5 percent

South Dakota                                None                                                 None

Tennessee                                      6 percent***                                    6.5 percent

Texas                                              None                                                 None ****

Utah                                               5 percent                                          5 percent

Vermont                                        3.55 to 8.95 percent                       6 to 8.5 percent

Virginia                                          2 to 5.75 percent                             6.5 percent

Washington                                   None                                                 None

Washington D.C.                         4 to 8.5 percent                               9.9975 percent

West Virginia                               3 to 6.5 percent                               8.5 percent

Wisconsin                                     4.6 to 7.75 percent                         7.9 percent

Wyoming                                       None                                                None

* New Hampshire levies an 8.5 percent tax on businesses with gross income over $50,000.

** Ohio levies a commercial activity tax on certain businesses.

*** Tennesssee’s tax is on dividends and interest income only.

**** Texas imposes a franchise tax on businesses with revenues of $1 million or greater.

Pay as You Go

Remember that income taxes for small businesses are paid quarterly, and that waiting until the end of the year could leave you with a large tax bill, including penalties. When starting your small business, or when you begin making enough money to garner the attention of tax authorities, get a tax identification number and begin making quarterly tax payments to comply with the law.

Use taxes

In addition to income taxes, many states charge use taxes on items purchased from outside the state. Online purchases have become a huge sticking point with states, as the proliferation of e-commerce and

sales tax free selling has depleted states of revenue. While individuals can get away with ducking the use tax, businesses can’t. Businesses who purchase items (office supplies, furniture, etc.) online should be sure to pay the use tax, as failure to do so may trigger an audit.

Hire a professional

Most  small business owners don’t have the time or the know-how to negotiate the morass of state and federal income tax rules on their own, at least not when they first get started. For your first year of operations, seek the help of a tax professional, but insist on seeing the forms he or she used to file your taxes and ask plenty of questions about the process. If you’re running a small, home-based business, you’ll probably be able to handle taxes on your own, but in the beginning it helps to have a pro guide you through what’s necessary to comply with the law and what deductions are available to you. Larger businesses may want to continue using a tax professional, particularly ones with many potential deductions.

The tax deductions offered to small businesses typically fall into two categories:

Business expenses are the costs of conducting your business. Travel expenses, storefront rental, etc. are typical tax-deductible business expenses. Business owners must be able to prove to the IRS that the expenses they are deducting are ordinary and necessary, meaning that they’re commonly taken by business owners in your field and necessary to the conduct of your business.

Depreciation, amortization or depletion of capital expenses are another form of tax deductions available to businesses. Capital expenses are costs incurred by buying property or equipment that you’ll use for more than a year and will help increase the quantity and quality of the goods and services that your business sells to the public. They are not tax deductible like business expenses, but deductions can be earned through depreciation, amortization or depletion.

For example, if you’re the proprietor of a construction company and you buy a bulldozer, this is a capital expense and is not tax deductible. However, you can deduct part of your cost each year and recover some of your capital expenses throughout a multi-year time frame.

Determining the difference between business expenses and capital expenses can be tough. The IRS offers a number of no-cost tax training opportunities for small business owners and an accountant can provide you with professional advice.

The following are a few popular tax deductions used by small businesses to lower their tax burden:

Home office deduction – If your home is your place of business, you may be able to deduct a portion of your rent or mortgage, insurance, repair bills and utility costs from your taxes. To qualify for this deduction, you must have an area of your home dedicated to the exclusive use of your business and your home must also be your primary place of business.

Vehicle expense – This is another popular tax deduction for small businesses. If you use a car exclusively for your business, you can deduct most expenses involving the vehicle. If it’s a mixed personal/business use vehicle, you’ll have to determine your business-related expenses based on actual mileage. The IRS website can help you figure out how to do this.

Travel – If you travel in the course of your business, you can deduct just about every cost of your travels, including lodging, airline tickets, laundry costs, etc. You can also deduct gifts to customers or vendors, such as taking a potential client out to eat or to an athletic event. The exception is meals, which you can only deduct half of the cost. These deductions apply only to business trips. If you take a mixed business/vacation, you can only deduct the business-related costs of the trip.

Depreciation – You can deduct capital expenses through depreciation, deducting a portion of their cost over their service life. In some cases you may be able to use a Section 179 deduction to deduct the full cost in a single year, but you forgo being able to depreciate the capital expense any further in succeeding years.

Depreciable property must be property you own that is used in your business and have a useful life of more than a year. It must also not be property that you use and dispose of within a year.

Losses – If your business posts a net operating loss for the year, you can deduct the loss from your other income to lower your overall tax burden, up to certain limits. You can even spread out the loss over several tax years, reaping the maximum tax benefit from your net loss.

These are some of the most commonly used tax write-offs by small businesses. A qualified accountant or financial advisor can help find even more. Research of tax law on your own part may also yield a thus-undiscovered tax advantage you can use to your advantage in decreasing your overall tax burden.

Sales taxes are taxes assessed on goods and services sold. They’re typically assessed on a percentage basis. For instance, if you’re required by the government to levy a 9 percent sales tax, that means your customers must pay 9 cents in taxes on every dollar they spend.

Sales taxes are levied by state and local governments and vary from state to state and even municpality to municipality. For example, your state may levy a four percent sales tax and your city a three percent sales tax, while a neighboring city may levy only a one percent sales tax. This means your customers will pay 7 percent in sales taxs, while in the neighboring city will only pay 5 percent in sales taxes.

As the business making the sales, it’s up to you to charge your customers the sales taxes required by your state and local government and pay these taxes to the appropriate governmental agenices.

For starters, you’ll need a state sales tax permit, which you can obtain from your local branch of your state’s revenue department. This gives you an identification number and permit to collect sales taxes.

Here’s a few simple steps to help guide you through the process of collecting and remitting sales taxes.

- Determine if your business is obliged to collect sales taxes, and on what products sales taxes must be collected. Some states and localities have sales tax exemptions for groceries and other items.

- Charge the appropriate tax on each transaction. You may either add the charge to your customers’ bill or embed it in the price of your goods. For example, if you’re selling a product for $100 each and the sales tax is seven percent, you can charge the customer $107 dollars or just charge $100 and deduct the appropriate amount of sales tax from your profits.

- Keep track of collections. Open a bank account specifically for sales tax collections and deposit them into the account each day. Do not mix your sales tax money with your business’ accounts.

- Remit your sales tax by the monthly deadline. If you miss remitting your sales tax by the deadline, you can incur a hefty penalty.

- Use tax forms provided by your state’s department of revenue to submit taxes. Also keep careful records of your sales in the event of an audit.

Proper collection and submission of sales taxes is important, as failure to comply with the law can result in penalties and interest. Using software or devices to “cook the books” and suppress sales taxes can result in criminal charges.

Online Businesses

If you’re selling products online, you’re typically not required to collect sales taxes for the state your customer is ordering from unless you have a physical presence, or nexus, as defined by law, in that state. However, states have recently begun pushing to require businesses to collect and remit sales taxes. Enforcement of such an action may be problematic, however.

Customers who buy products online are required by law

If you’re unsure about what items you’re required to collect sales taxes on, or sales tax rates, contact your state revenue department. They can provide you with the information that you need, as well as the appropriate forms for submitting sales taxes.

Employers have the obligation of withholding various state and federal (and in some cases, local) taxes from their employees paycheck and handing the money over to appropriate government agencies. Employers also must pay taxes themselves based on how much their workers are paid.

The taxes employers are typically required to withhold from employee paychecks and pay themselves include federal, state and local income taxes, Social Security and Medicare taxes, unemployment taxes and disability insurance taxes. Business owners may also be liable for payroll tax withholding on the income they derive from their businesses.

Workers Subject to Payroll Taxes

While you might think that anyone who does work for you counts as an employee, tax code just isn’t that simple. The IRS has definitions of employees and not everyone who comes in and does a little work for you may classify as an employee. In general, workers are classified as your employees if they meet a common-law test that defines them as employees rather than independent contractors. Here’s a 20-point test for determining whether workers are employees and subject to withholding:

1. Instructions: Are your workers required to follow your lead on when, where and how they perform their duties? If so, they’re probably employees and not independent contractors.

2. Training: If you provide your workers with a substantial amount of training, they’re more likely to be classified as employees, as independent contractors are expected to already know how to perform their work, making substantial training from you unneccessary.

3. Integration: The more vital your workers’ contributions to your business are, the more likely it is that they’ll be classified as employees.

4. Personally rendered service: Do your workers perform the tasks you give them on their own, or do they have the option to farm it out to others? Independent contractors can substitute other people’s work to complete the tasks you assign them, employees usually can’t.

5. Assistants. Workers who can independently hire assistants are more likely to be independent contractors.

6. Continuing relationship. Workers who regularly perform work for you over a period of time or at regular intervals are more likely to be classified as employees.

7. Work hours: If you set your workers hours, they’re more likely to be classified as employees, as worker who set their own hours are more likely to be classified as independent contractors.

8. Full time. If you require your workers to work on a full-time basis, they’re more likely to be classified as employees than independent contractors, who have more leeway to determine who they work for and when.

9. Work performed on your property: Workers who perform their assignements on your premises or at a location designated by you are more likely to be classified as employees, as independent contractors often work out of their own places of business.

10. Order or sequence set: If you determine in what order your workers perform their assignments, chances are that they are employees rather than independent contractors.

11. Reports: If you require your workers to keep you up-to-date with regular reports, chances are the government will classify them as employees.

12. Per hour vs. per job: Workers who are paid by the hour or based on time are more likely to be classified as employees, whereas workers who are paid on a per job basis are more likely to be considered independent contractors.

13. Expenses: If you cover your workers’ business and travel expenses, they’re more likely to be classified as employees, as independent contractors are usually expected to pay for their own expenses in performing their work.

14. Tools and supplies: Workers who supply their own tools and equipment are more likely to be considered independent contractors.

15. Investment: The larger the worker’s personal investment in the facilities and tools they use in the performance of their assigned tasks, the more likely it is that they’re independent contractors. Workers who have little or no investment in their work tools and equipment are more likely to be employees.

16. Profit or loss: The more likely it is that your workers will make an individual profit or take a loss as a result of their work for you, the more likely it is that they are independent contractors, whereas employees compensation is more settled.

17. Multiple employers: If your workers supply services to you some of the time and services to another business for some of the time, chances are that they are classified as contractors, whereas employees are more likely to exclusively offer their services to you.

18. Services available to the public: Workers who offer their services to the general public by means such as business cards or other advertising are more likely to be classified as independent contractors. Employees are more likely to offer their services exclusively to your company.

19. Firing: If you can fire your workers at any time, they’re more likely to be classified as employees. Firing independent contractors is more likely to be governed by contractual agreements.

20. Quitting: Similar to firing, if your workers can quit at anytime without incurring penalties, they’re more likely to be classified as employees, whereas contractors are often subject to penalties if they quit during the middle of an assigned project or are unable to complete it.

If your employees have a strong majority of these factors leaning one way or the other, chances are they should be classified accordingly. If you’re still unsure about their status, you can consult with a tax professional or get a determination from the IRS.

Correctly designating your workers and withholding taxes accordingly is important as you can be hit with substantial state and federal penalties if you’re not correctly withholding taxes, including interest on the amount owed.

Wages Defined

Once you’ve determined your workers’ status, you must then determine whether the compensation they receive is taxable under the various types of withholding employees are required to make. Pretty much any monetary compensation to employees, such as wages, commissions, salaries are subject to withholding. This also includes prizes and bonuses and vacation and sick leave compensation.

Some benefits may not be subject to withholding taxes, however. These exceptions include:

- Health benefits.

- Contributions to retirement plans.

- Onsite gym facilities provided to employees.

- Metro and parking passes up to $230 per month.

- Small benefits such as occasional parties or tickets to athletic and entertainment events.

- Workers compensation and some life insurance.

- Dependent care assistance up to $5,000 per employee.

- Moving expenses provided to employees.

Business and mileage expenses provided to employees are considered in most cases to be non-taxable income.

Income subject to withholding may be subject to caps. For example, Social Security and Medicare taxes are only taken out of the first $106,408 of income, and caps on unemployment and disability insurance withholdings may also apply.

Determining How Much to Withhold

Once you’ve determined what compensation withholding is required from, you then must determine how much to withhold. This amount can vary based on your employees’ salary, and the amount of exemptions they can claim such as marital status or number of dependents.

Employees are required to fill out W-2 forms concerning their exemption information, and using this data employers can use tax tables available from the IRS and state tax agencies to determine how much to withhold for state and federal income taxes.

With regard to Social Security and Medicare Taxes, employers must withhold 6.2 percent of an employee’s salary for Social Security and 1.45 percent for Medicare and the employers must chip in the same amount. (A temporary tax decrease has lowered the employees’ share of SS taxes to 4.2 percent). The withholdings for Social Security apply to the first $106,480 of the employees’ income, and exemptions claimed on income tax do not apply. No caps exist for Medicare withholdings.

Employers must pay state and federal unemployment insurance taxes, however, these taxes are paid by employers and not withheld from employees’ checks.

In California, Hawaii, New Jersey, New York, Puerto Rico, and Rhode Island, employers must also withhold disability insurance taxes from employee paychecks. Rates vary from state to state.

Paying The Taxes

Once you hire your first employee, you’ll need to register with the IRS and probably also state tax agencies. The IRS will assign you an employer identification number, which you’ll use on all official correspondence. You’ll need to remit the taxes withheld from employee paychecks to the government at least once per month, and keep careful records of these transactions. The IRS and state agenices will inform you of your tax obligations and supply you with the appropriate forms you can use to determine and submit your tax obligations.

Penalties

Getting your tax withholdings done correctly and remitting the money to the government in a timely fashion is important because civil and criminal penalties can be assessed if you don’t. Businesses that fail to properly remit taxes can be forced to pay the taxes from their own funds and can also be assessed interest on those amounts. Each instance of falsified or incomplete documentation can also be hit with a fine. For severe violations, the IRS may pursue criminal charges against you.

Consider this: Nearly 40 percent of small businesses incur IRS penalties of about $845 per year because of payroll tax errors. And that’s just one area of your business subject to tax law. While many small business owners dream of being a part of the “one percent,” not the 1.5 percent of business owners subjected to an IRS audit each year. Here are a few ways to help keep you out of tax trouble and out of the IRS’ crosshairs:

1. Poor record keeping – Be sure that you keep receipts for all expenses, particularly meals and entertainment over $75. That way, if the IRS asks you for documentation of your deducted business expenses, you’ll be able to produce it. IRS rules require that you keep receipts for three years after the tax return they apply to has been filed. By keeping the receipts you need, you’ll be in good shape if the IRS demands an audit.

2. Not keeping a tax diary – A detailed and accurate tax organizer can go a long way toward helping you answer questions revenue officials may have about your claimed expenses, such as travel and entertainment. A good tax organizer should run about $100, and in light of the hassles and large costs you could pay as the result of an audit, it’s a great investment.

3. Tapping into employee tax withholdings in hard times – Diverting money from the tax withholdings you’re supposed to make from employee paychecks can be a big temptation for business owners in dire straits. Many business owners have done this, treating the money as a temporary loan to their businesses. The risk is not worth the reward, however, as the business owner is held personally liable for this money and could incur substantial penalties if caught by the IRS.

4. Missing common deductions – Remember that many expenses that you incur can be tax deductible. If you work from home, a portion of your mortgage or rent and utility bills may be deducted from your taxes. If you’re on the road frequently, dry cleaning and entertainment costs for business associates can also be tax deductible. Frequently review your expenses and tax rules as the regulations concerning what’s deductible can change fairly often.

5. Failing to oversee bookkeepers and accountants – While you may not be a financial expert, you should take the time to give a cursory look at your books and tax returns to ensure no big mistakes or questionable items are entered. Also, be sure to not use the same person as your bookkeeper and accountant, as having two sets of eyes on your finances reduces chances of fraud and error.

6. Miscalculating automobile expense deductions – This deduction causes a bit of confusion because business owners can use either a mileage formula to come up with their deduction or they can tally up the actual expense of using the automobile. The mileage deduction is easier to calculate, but if your car depreciates in value significantly or has incurred significant costs, the more difficult to calculate actual expense may be a more advantageous method.

7.  Putting equipment and supplies together  – Equipment should not be lumped with supplies as the rules governing deductions are different for equipment and supplies. Most small businesses are allowed to deduct up to $24,000 in capital expenses, which includes equipment. When deducting equipment, you must determine the depreciated value of the equipment before claiming your deduction. Supplies, such as paper, printer ink, etc. can be deducted without this calculation.

8. Incorrectly classifying employees as independent contractors – Employees work for you directly, independent contractors work for themselves or a company contracting with yours. It’s very tempting to classify workers as independent contractors, as you won’t have to pay employment taxes on them or deal with the burden of withholding payroll taxes. However, if you classify workers as independent contractors, and the IRS decides that they would be more properly classified as employees.

9. Late payments – Don’t forget that your taxes are due on a quarterly basis. Businesses that wait until April 15 to pay their taxes could face substantial penalties for late payment. By following “pay as you go” rules, you can avoid penalties and make the April 15th tax filing deadline a little less dreadful.

10. Failing to report large cash transactions – The IRS requires that cash transactions of $10,000 or greater be reported on Form 8300. This includes cash transactions spread out over a period of time for the same item or service that add up to more than $10,000. This rule is intended to hinder money-laundering efforts by drug and organized crime operations and terrorists.

Even if you’re a math whiz and great at spotting deductions, you still may want to get your business’ tax returns scrutinized by a tax professional, as they likely will have superior knowledge about tax rules and what’s deductible.

By making sure that you follow all tax rules and regulations, you can help stave off audits and tax headaches from government officials and also avoid the large penalties that may be assessed against your business as a result of non-compliance with tax laws.

Getting your business appropriately registered can help you comply with tax and other rules and protect your business name and brand from being appropriated by another party.

FEIN

If you run a business, one thing you’ll need to comply with federal tax laws is a Federal Employer Identification Number, or FEIN. The Federal Employer Identification Number is essentially your business’ Social Security number, providing a way for the government to identify your business.

Even if you don’t have any employees, partnerships, LLCs and corporations need the Federal Employer Identification Number to fill out federal tax forms and local registration and business licensing forms. (If you’re a sole proprietor and have no employees, you may use your own Social Security number instead.)

Applying for a Federal Employer Identification Number for your small business is relatively easy. All you have to do is fill out and submit IRS Form SS-4 (which is available online) and submit it via the mail or through the IRS’ free Tele-TIN phone-in system.

Form SS-4 has several basic fields that you’ll need to fill out, including questions about your business name. These questions include:

1. The legal name of the person or entity applying for the Federal Employer Identification Number – If you’re a sole proprietor, enter your full name, first, last and middle initial. If your business is a partnership, enter the legal name of your partnership as it appears in your partnership agreement.  If you don’t have a formal partnership agreement, enter a business name containing the surname of each partner or a trade name you intend to call the business. LLCs should enter the official name of the business as it appears on its Articles of Organization. A corporation should enter the legal name on its Articles of Incorporation.

2. Your trade name – This field asks for the name that your business will be called. This field can be left blank if the business name will be the same as the name you entered on line.

The remainder of the 18 fields of your Form SS-4 include fairly straightforward questions about the legal structure of your business, why you’re applying for a FEIN, the type of business you’re running, number of employees, etc.

Registering Your Business Name

Registering your fictitious business name, that is, the name of your business, is important to prevent confusion between two local businesses that may have the same name and to give state authorities and customers an easy way to readily identify businesses and their owners. Registration makes it easier for state regulatory authorites to investigate and handle complaints of fraud or deception on the part of business owners.

Typically, if your business is a sole proprietorship and your last name is the name of the business, (for example, Johnson Mobile Homes) you don’t have to register your fictitious business name. Partnerships using the last names of the partners also may not need to register. However, you may want to register it anyway to prevent local competitors from using your business name and confusing customers.

Corporations and LLCs do not need to file a fictitious business name statement if their business name is the same as the official name in its Articles of Incorporation or Articles of Organization.

When filing a FBN statement, many states will require you to search a FBN database to ensure that your business name doesn’t infringe on an already registered name. You may also want to do a search of state registries of corporate and LLC names to avoid infringing on another companies trademarked name.

Most states will require you to register your fictitious business name with the county clerk of the county where your primary business site will be located. This registration process is called different things in different states such as DBA (doing business as) filing, trade name registration, etc. Some states will also require you to register your business name with the secretary of state.

Once you’ve registered your FBN, in some states you’ll be required to publish it in the newspaper of record of your community.

Also, be sure to pay attention to any possible expiration date for your registration, as you’ll need to go back and re-register once it expires.

Getting your FBN registration completed is important, as many banks will decline to open an account for your business unless you have a completed FBN registration. Also, if your name isn’t registered, it won’t appear in state databases and another local business could take your name, causing you trouble, especially if you’ve already established a customer base and printed signs and t-shirts and other marketing material.

Getting the appropriate FEIN and FBN paperwork done is important, as it will head off problems with tax compliance and local and state business regulations. Do not put off this important component of successfully and legally starting a new business.

If your business is located in your home, you may be able to deduct some of your home expenses – costs such as rent or depreciation, utilities, insurance premiums, property taxes – from your federal taxes. In general, the IRS allows qualifying home businesses to deduct a pro rata – that is a share proportional to the area used for business – of these expenses from your federal taxes.

Basic requirements

The IRS has a pretty broad definition of home, defining it as just about any type of dwelling where you can sleep and prepare meals, so this can include houseboats, apartments, mobile homes, campers, etc. Simply put, if you live there, it’s your home.

Aside from the definition of “home,” IRS rules about the home business deduction are pretty tight. When deducting expenses for a home business, you must regularly use part of your home exclusively for business and be able to prove that you use your home as your principal place of business, regularly meet customers there or use a separate structure on your property for business purposes.

You are only allowed to deduct home business expenses if you have space in your home that is completely dedicated to business use. For example, if you have a spare room that you use exclusively for an office, chances are very good that you can claim that room for the home business deduction. If you occasionally use your kitchen table to set your business laptop on while your work, chances are you can’t claim the kitchen for the home business expense.

There are exceptions to the exclusive use rule. If your business use for a portion of your home is for storing inventory or product samples, or if you’re running a qualified day care center, the exclusive use rule does not apply.

You may not always be able to claim storage area as a home business deduction under the exemption, however. If you have an off site office or place of business, you may not claim storage area under the home business deduction. Also, to take the deduction, your items must be stored in a specific part of your home.

Once you meet the exclusive use threshold, you still must meet the principal place of business requirement. To successfully claim the home business deduction, your home must be your principal place of business, meaning that nearly all of your business activities are conducted there. You are allowed to meet clients or customers outside your home and still claim the deduction.

Calculating your home business expenses

Once you’ve established that your qualify for the home business exemption, you’ll need to calculate the costs that you can deduct from your taxes. You won’t be able to deduct all the expenses of your home, just those related to the operation of your business.

First, you’ll need to calculate the percentage of your home used for business, using either the square footage method or number of rooms method. The square footage method requires you to divide the square footage of the area of your home used for business by the area of the entire house. For example, if you live in a 1,000 sq. ft. home and use 100 sq. ft. for business, you’d divide 100 by 1000 and get .1, meaning that you use 10 percent of your home for business.

Under the number of rooms method, if your home has five similarly sized rooms and you use one for business, you would divide 1 by 5 to get .20, meaning that you use 20 percent of your home for business.

Once you have your area percentage, you may use it to determine what portion of your home expenses are deductible from your federal taxes. Home expenses fall into three categories: unrelated expenses, direct expenses and indirect expenses.

Unrelated expenses are home expenses unrelated to your business and cannot be deducted. For example, you cannot deduct the cost of a new bed or repainting your children’s room.

Direct expenses can be deducted entirely. Direct expenses may include things such as the cost of installing new carpeting or ceiling fans in the business area.

Indirect expenses are expenses that affect the entire residence, a portion of which you may deduct. Indirect expenses include rent, utilities, insurance, etc. This is where the business percentage calculation comes in handy. If your rent is $500 per month, and you’re using 20 percent of your home space for your business, you may deduct $100 per month ($1,200 per year) from your taxable income. You may also apply this calculation to other expenses, such as insurance, property taxes and utilities.

In case the IRS has questions about your use of a home business exemption, you should keep records to document the use of your home as a place of business. You should take pictures of the area used as an office, have a diagram of your home’s floor plan showing the designated business area, have a log of the times you are in the business area of your home, and have your business mail sent to your home address.

Even if you don’t qualify for the home business exemption, there are other costs you can deduct from your federal income taxes, such as your business-related phone costs, office supplies, furniture for your home office, etc.

More than 2,000 local governments impose some sort of income, wage or occupational tax. Small business owners, even home-based business owners, may end up paying these taxes on their income and may be required to withhold taxes on the income of any employees they may have as well.

Also, even if you don’t live in a community, you may still have to pay its local occupational or wage tax if you do business there.

Complying with local income tax law is important, as non-compliance may result in penalties and may impact your business license. To find out whether you need to pay local income tax, a wage tax or occupational tax, contact your local municipal government. They can help you find the forms necessary to calculate and pay your local income, wage or occupational tax obligation.

As with your state and federal income tax forms, you’ll likely want to get a tax professional to help you with your local income tax, as there may be deductions that you’re entitled to that a qualified professional can point you to.