This week in our tax segment, we wanted to talk about the IRS’s own Frequently Asked Questions by small business owners. It’s a pretty good list of topics that every business owner should be on top of.
First one is, “We’re about to hire employees and need to know how much federal income tax to withhold and where to send the money with employment taxes?” Well, if that’s your question, then perhaps you don’t even have a Tax ID number yet. So the first thing you do is get a Tax ID number, and you download a document called the “Circular E” or you can simply hire a payroll service. Payroll is not something that you want to mess around with as a business owner. You don’t want to try to finance your company off of the withheld taxes or employer taxes, so that’s something you want to get right and keep right.
Next question is, “What’s the difference between a W-2 and a 1099 or a 1099-NEC?” And a related question is, “How do you determine if a worker is an employee or an independent contractor?” Excellent questions! An independent contractor will get a 1099. An employee will get a W-2. But what is the difference? We’ve had many clients over the years who like to play loosey goosey with employees and contractors. It’s not a game that you’re ever really going to win, and it’s not a game that you can play if you’re serious about retaining top talent for your business. The IRS has a list of points that will tell you whether or not a person is a contractor or an employee. There’s really no gray area. It either is or it isn’t. We suggest you get those lists!
“I started a small business and want to know if I must pay income taxes quarterly throughout the year.” As we said last week, if you’ve not already started thinking about 2021 taxes, even though the 2020’s are just now being due, you’re already behind. If you are a small business owner, whether you’re a sole proprietor or a parntership, you’re likely taking distributions, which means you need to pay estimated taxes on that information. That’s something you need to get on top of. We can help you do that!
A couple more of many: “Does a small business that operates as a sole proprietorship need an Employer Identification Number?” Yes and no. If you’re going to have employees, yes. Or if your company is going to be hired by somebody else and receive a 1099, then we suggest that you get a Tax ID number for your business. It’s free. It’s easy. You do it online, and you get the number immediately. We suggest you do that!
Take a look at this FAQ! Again, it is time to be thinking about 2021 taxes as it relates to your business planning, because if you’re not planning for taxes, you’re not planning for your business. Please reach out and let us know how we can help with this in your organization!