Tax Laws and Small Businesses

View all blog posts under Articles | View all blog posts under Taxation

man reading through papers

Managing a small business’s finances is a challenging task, particularly when it comes to taxes. While it is impossible to succinctly summarize all the tax laws that small businesses must follow, there are some basic tenets that should never be overlooked.

Employment Taxes

Tax laws require businesses to withhold certain taxes from employees’ pay. Employers must withhold federal income tax, social security and Medicare. The IRS has available forms that help payroll managers figure out exactly how much they should withhold.

Businesses must also pay the Federal Unemployment Tax, otherwise known as FUTA. This is not something that gets withheld from employees’ pay. Rather, it comes from the business’s funds. The FUTA is equivalent to 6.2 percent of the first $7,000 an employee earns per year. Earnings after $7,000 are not taxed.

It is important to note that how employees are classified impacts taxation. For example, businesses are not responsible for paying taxes for any independent contractors they hire. However, businesses must classify their employees correctly and understand the definition of an independent contractor. Businesses that incorrectly label those who work for them could end up paying back taxes and fees later on.

The Affordable Care Act

Under the Affordable Care Act, which requires most Americans to have health insurance, many businesses must offer some form of health coverage to their employees. Businesses that have more than 50 employees and fail to offer basic health insurance could face fines when filing taxes. The penalty for not providing coverage is $2,000 per employee.

Businesses that have 50 or fewer employees are not required to offer health coverage.

The Affordable Care Act is complex, and it is impossible to summarize it completely here. The full law is available for perusal online.

Credits and Deductions

There is a slew of possible tax credits and deductions that small businesses might take advantage of. Following are just a few of the most prominent:

  • The Work Opportunity Tax Credit. This credit serves as an incentive for businesses to hire workers from particular groups, such as veterans. Businesses can claim this credit retroactively if they hired qualified employees in recent years and missed out on the credit.
  • Automobile expenses. The miles an entrepreneur drives for his or her business are tax-deductible. Business owners can use the standard mileage rate method to calculate this deduction, but the actual expense method is also an option. If a business owner chooses the actual expense method, the depreciation of his or her vehicle’s value can also serve as a tax deduction.
  • Professional fees. New business owners, in particular, might feel the need to turn to tax law experts to help them manage their taxes. The fees the business pays to these professionals are tax-deductible.

Figuring out tax laws is a daunting task for many small business owners, but acquiring the appropriate professional help and understanding basic tax guidelines can help owners make sure they file their taxes correctly.

Learn More:

Master of Taxation (MT) Program

Master of Laws in Taxation (LLM) Program

The articles, materials and information (referred to as “Content”) provided via this site are for personal, non-commercial, informational purposes only. None of the Content constitutes, or is intended to serve as, legal, financial or tax advice. The Content does not convey the official position or endorsement of Villanova University. The Content is provided “as is” and without any warranties, representations or guarantees, and any implied warranties, representations or guarantees are hereby expressly disclaimed. Any tax analysis or observations included in the Content may not contain a full description of all relevant facts or a complete analysis of all relevant tax issues or authorities. In addition, any tax analysis or observations contained in the Content is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending any transaction or matter addressed herein. Individuals should consult their legal, financial, tax advisors for a full analysis and advice related to their specific facts.

Image via Flickr by Michael_P