The government is probably the single biggest obstacle to starting and running a small business. Why? Lack of knowledge on the part
of the business owner. These law abiding citizens wish to "do the right thing", but the numerous rules and regulations
baffle and frighten them. They decide to work "under the table" or (worse) decide that running a business would be too difficult.
I will identify the various agencies, their purpose,
your responsiblilities, so that the fear and mystery disappear. The government can actually be a good
source of assistance and information.
As the government grows and adds more and more rules and regulations, running a business becomes more difficult. At the same time, however,
there are plentiful resources at your disposal. I have actually found most government employees to be quite helpful. The trick is to have
the right attitude when approaching them. There are rules, but if you learn them and abide by them, you need not fear them.
Having said this, I will move on to identifying the various agencies you must deal with. This may not
be a complete list for your area. For example, you may also have homeowner association rules to follow, as well
as other state and local regulations.
Internal Revenue Service
Business and Personal Income Taxes
941 / 944 Taxes:
Social Security Taxes
Federal Unemployment Tax
Immigration Laws and Illegal Alien Hiring
State / Local Government:
State Department of Revenue
Business & Occupation (B & O) Tax (not all states)
State Income Taxes
Department of Assessment
Go to Resource Links for links to
important government agencies, as well as other helpful business sites.
If you have employees, you will need to familiarize yourself with all of the above. If you do not have employees, you will not
have employment taxes. Therefore, you will not need to know about 941, 940 or state employment taxes. You still must understand the law, however,
because you might have subcontractors or others whom you pay for services. You must be sure the person qualifies as a subcontractor (does she have a business license? Are you
making the check out to "Mary Jones" or to "ABC Embroidery"?), or the government will see the person as
your employee. If in doubt, the state usually rules in favor of "employee" status. This makes YOU responsible if the
person gets injured on the job. It can also make you responsible for employment taxes. I have seen some true nightmares regarding
this. This can even extend to second level - such as employees of someone you hire. There are several criteria
for qualifying as "subcontractor" rather than "employee". Be sure you are familiar with them.
FEDERAL GOVERNMENT: IRS
BUSINESS AND PERSONAL TAXES
As for federal taxes, you will owe income taxes based on the profit your business makes. If you are incorporated, your business will owe it independently
from your own personal taxes. It is as if the business is a separate person from you. If you are a sole proprietor, the business profit is your earnings, whether you
paid yourself or not. See Chapter One: Sole Proprietor.
Your CPA will figure out for you how much your business should pay into income tax during the year to ensure you
have paid enough by any due dates. If you are incorporated, your tax payments for the company's income tax will be paid with an 1120 coupon, deposited at the bank, and your own personal
taxes will be paid through wihholding from the paycheck your corporation pays you. If you are a sole proprietor, your company is not separate from you, legally, so it does not have
its own income taxes to pay. You will make estimated tax payments with 1040 ES(or have your spouse take out enough extra from
his paycheck to cover your taxes - much easier!). At year end, you will file form 1040 with Schedule C (profit/loss) and Schedule SE (Self Employment Tax:
since you are employer and employee, you must pay both sides of social security and medicare).
If you are a partnership, the partnership itself (company) files form 1065 with a Schedule K-1 for each partner (information only
for the IRS). Each partner files form 1040 ES (for estimated income taxes due) and, at year end, form 1040 with schedule E and Schedule
941 / 944 TAXES
When you subtract income tax and social security (when I say social security, I am also including medicare) tax from your employees, you must give that money
to the government. If you file quarterly you will file a 941 form. If you file annually you will file a 944 return. The government can tell you which one you must file.
You must also match the social security portion of the tax. That means that if you withhold $9 from pay for income tax (called withholding)
and $7.65 for social security tax, you must turn that money in, along with $7.65 of the company's money. A total of $24.30 must be turned in.
If this is all you owe, you can turn in the amount at the end of the quarter when you fill out the 941 return. Once you owe
If you meet the current minimum for monthly deposits (or more frequent than monthly) you must fill out a 941 coupon (mark the box "941") and deposit the funds at your
bank. Your banker will set this up for you. If your payroll is large, you may need to make deposits more frequently than monthly. Your CPA
can answer such questions for you. Smaller businesses will file a 944 return annually, but still may need to make deposits during the year. See IRS publications 539 and 937 for further information on employment taxes.
This covers federal unemployment. This is paid only on the first $7,000 ($7,000 in 2001 - check current rules) of payroll per employee and a credit is given
for amounts paid to the state for state unemployment. The Federal Unemployment Tax (FUTA) is paid by the employer.
The business is not allowed to deduct any portion from employee pay. Due to the credit for amounts paid to the state, the federal rate of unemployment tax varies. Generally, when
you owe $100 or more you make a deposit to the bank using a coupon as you would a 941 deposit. Mark the box "940".
Your 941 returns must be filled out and mailed in quarterly. The 940 return is done annually.
If you are an employer, your taxpayer ID number is the Employer Identification Number provided to you by the IRS. If you are not an employer, your
tax ID number is your social security number. Always have your taxpayer ID number ready when you call the IRS.
See the following website for IRS publications. They are easily downloaded and printed.
NOTE: It is now possible to file returns and make payments online directly with the IRS. Go to their website for further information. Your bank might also offer the capability of making online deposits with the IRS.
FEDERAL GOVERNMENT: JUSTICE DEPARTMENT
The justice department handles immigration law and non-citizen hiring. IT IS YOUR RESPONSIBILITY as business owner
to be sure that all employees are hired legally.
STATE / LOCAL GOVERNMENT: DEPARTMENT OF REVENUE
Each state has a department of revenue. NOTE: The name is similar, but this is NOT to be confused with the
Internal Revenue Service (IRS), which is the the federal government. The State Department of Revenue collects
Business and Occupation taxes for the state (if your state has such a thing) as well as sales and use taxes. Sales tax
is also known as retail tax. Use tax is related to sales tax and I will cover that after retail tax.
Retail tax is made up of 3 parts. Part of the tax goes to your state, part goes to your county and part goes
to the city where the business was done. In the state of Washington, you only have to file a return with the
state as far as collecting tax goes. There is a place on the return for designating what city the tax is due to. You still must have a
license to do the business in the state AND in any city that requires one. In some states, cities collect sales
taxes independently from the state, and require their own return. That means that you must be fill out a return for the city as well as
a state return. In other states, city and state taxes are paid with the same return. So, you must know your own state, and whether your
local location requires a license. You must always have a state license if you are selling anything that requires sales tax, as well
as possibly a city license. Whether or not you need to have a license just to do business (i.e. you are not in the retail business) depends on
your location and your local requirements. You may also have other issues, such as homeowner's association rules, that
determine whether you can run a home business, etc. Check with your city government as well as your state department of revenue.
If your state collects sales tax and you buy an item out of state (from a state that does not collect sales tax)
or over the internet without paying sales tax your state wants the sales tax. The gross amount of the item is entered on the return, and the tax is paid under "use tax".
Businesses tend to get caught on this one! If you buy something at a garage sale for your business, you should pay "use tax" on that item.
STATE INCOME TAX
Become familiar with your own state's rules on this. Know what forms are used and what payment schedules are required.
STATE GOVERNMENT: STATE UNEMPLOYMENT
In Washington State, the Employment Securities Department handled state unemployment. This amount is paid by
the employer only (i.e. the business is not allowed to deduct it from employee's salary). The amount was paid
each quarter, when it was sent in with the return. Rates depended on each business's lay-off history. States vary on this.
Familiarize yourself with your state's policies, returns and payment requirements.
STATE GOVERNMENT: DISABILITY
States such as California have state disability. Washington did not have disability, but it did have insurance
which was provided through the Department of Labor and Industries. Part of the amount could be deducted from
employee pay and the remainder was paid by the employer. The rate depended on the profession. SCUBA diving was very
expensive (several dollars per hour) and clerical work was relatively cheap. Again, familiarize yourself with your own
DEPARTMENT OF ASSESSMENT
Businesses must also pay property taxes to states and localities that require it. For example, you may have
to pay property tax to your city, county and/or your state. This is separate from any of the taxes mentioned above. It is
paid according to your businesses assets. Check with your own local governments.
I can't be more specific with state and local information, because states have different agencies and different ways of handling things.
Look for any small business seminars that are provided by your local state government. These are free and provide a wealth