Common Small Business Tax Concerns

As your business grows, you will probably need to hire employees.  Some of the most common tax concerns involve employee tax issues.  When you hire employees, you have to file timely payroll tax returns and make the required tax deposits. 

Payroll taxes include three types of taxes:

• Income Tax-You must withhold the proper amount of income tax from each employee's paycheck throughout the year.
• Social Security and Medicare Tax or FICA-You must withhold the employee's share of FICA taxes from each paycheck and you must match that amount.
• Federal Unemployment Tax or FUTA-This tax goes to the unemployment insurance system and is paid by the employer. The employee pays no part of FUTA.

Always pay your payroll taxes in full and on time.  If you don't, the IRS adds interest and large penalties. 

Another common tax issue is misclassifying workers.  Workers are usually classified as either regular employees or independent contractors.  Business owners have payroll tax withholding and reporting obligations for all of their employees; however, business owners don't have to withhold or make contributions for payroll taxes for true independent contractors. 

If you plan to use independent contractors rather than employees, take the IRS test, which lists 20 factors to determine whether a worker is an employee or contractor.

The following chart gives examples of when workers should be classified as employees or independent contractors: