Small Business Tax Basics

Employee Taxes
If a business has employees, a variety of taxes will have to be withheld from their salaries. Among them are:

• Withholding. Social Security (FICA), Medicare, and federal and state income taxes must be withheld from employees' pay.
• Employer matching. Businesses must match the FICA and Medicare taxes and pay them along with employees.
• Unemployment tax. Businesses must pay federal and state unemployment taxes.

Read Payroll Taxes for Your Small Business for more detail.

Quarterly Estimated Taxes
This area trips up many entrepreneurs, and is especially vexing for home-based businesses. Failure to keep up with estimated tax bills can create cash flow problems as well as the potential for punishing IRS penalties. Among the issues are:

• Who should pay? A business probably must pay quarterly estimated taxes if the total tax bill in a given year will exceed $500.
• How much should you pay? By the end of the year, either 90 percent of the tax that is owed, or 100 percent of last year's tax must be paid (the figure is 110 percent if a business's income exceeds $150,000). Businesses can subtract their expenses from their income each quarter, and apply their income tax rate (and any self-employment tax rate) to the resulting figure (their quarterly profit).