Employer to Employee: Your Responsibility to Collect Taxes
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Employer to Employee: Your Responsibility to Collect Taxes

To collect and remit taxes as an employer, you need to use IRS Form SS-4 to receive an employer tax number. If the state in which you operate also collects income tax, you will need a state tax number.
                        IRS - business tax

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Even though you may be a sole proprietor when you launch your business, you may eventually hire some employees. When you do, it is your responsibility to take out taxes from their paychecks. The taxes you need to be concerned with are Social Security and income tax. Once you have collected them from your employees, document the amount in your records and forward the money to the appropriate government agencies.

To collect and remit taxes as an employer, you need to use IRS Form SS-4 to receive an employer tax number. If the state in which you operate also collects income tax, you will need a state tax number. Call the local offices of the federal and state agencies, listed in the White Pages under "United States" and "State Government". The federal agency will send you your number as well as charts to calculate payroll tax deductions, quarterly and annual forms, W-4 forms, tax deposit forms, and an instruction manual explaining how to fill out the forms.

Corporations earn income. If you incorporate your business, you must file a corporate income tax return at the end of every year. Corporate tax returns may be prepared on a calendar-year or fiscal-year basis.

Operating as a sole proprietor or partner, you will not be paid a salary like an employee; therefore, no income tax will be withheld from the money you take out of your business for personal use. As a result, you must estimate what your tax liability is and pay it quarterly instead of annually. Contact an IRS office and request Form 1040 ES. This is the form you will need to report your tax liability every quarter. When applying for the form, also request the Tax Guide for Small Business.

Many home-based business owners prefer to use independent contractors to perform their service or market their product, rather than keep a staff of employees. Whether the reason is cost savings or personal preference, you should consider the advantages that independent contractors can provide you.

Hiring individuals as independent contractors requires filing an annual information return (Form 1099) to report payments totaling $600 or more made to any individual during the calendar year. If this form is not filed, you will be subject to penalties. Be sure your records list the name, address, and Social Security number of every independent contractor you hired, along with pertinent dates and the amounts paid to each person. Every payment should be supported by an invoice submitted by the contractor.

Advance tax deposits serve as insurance for states that collect taxes. A state will take a percentage of a business' projected taxable sales. For instance, California's state tax bureau requires that a new business must deposit 7.25% of the taxable sales it expects to have in its first three months of operation. If your projected taxable sales for this time period are $5,000, you would be required to deposit 7.25% of that amount, or $362.50, when applying for your sales tax permit number. If the state you operate in requires an advance deposit, you might want to provide a low, but still realistic estimate for your sales. This will save you money, which you can use to start up your business. After your business is open and earning more money, you can make up the difference. Your state's tax board can help you with this process.

If you sell a product, you are responsible for collecting and recording sales tax and forwarding it to the proper local and state government bodies. Your state and/or local revenue offices will be able to inform you when your sales tax returns are due and what amount is subject to taxation.

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Comments (3)

This is such a useful article to many. I appreciate it a lot.Promoted since I am out of votes.

nicely summarized

good for Americans, but as you know I am Canadian