Federal Tax Laws for Small Businesses

Taxes apply to small businesses at the federal, state and local level, and small business owners must pay close attention to each to avoid a filing error. Federal tax laws for small businesses fall under the authority of the Internal Revenue Service, which provides a strict tax calendar for small business owners to ensure that they submit taxes on time. Unlike individual taxes, federal tax filing for small businesses does not come but once a year, but rather occurs throughout the year.

Employer Identification Number

Most small business owners must apply for an Employer Identification Number (EIN) when they form and register their businesses. The EIN represents a business’s Social Security number, thus identifying it to the IRS for filing purposes. Small business owners will then use the EIN at each federal tax filing. (The EIN is separate from any state-provided identification number, and small business owners should not place a federal EIN on a state form unless specifically required.)

Employment Taxes

Federal employment taxes include a variety of different tax requirements. Among these, small business owners must withhold income tax, Social Security tax and Medicare tax from employee pay during each pay cycle. Small business owners must also pay Federal Unemployment Tax (or FUTA) from their own business funds, as employees do not pay unemployment taxes at the federal level. Self-employed business owners must pay Self-Employment Tax, which represents Social Security tax and Medicare for those who work for themselves. All employment taxes must be filed and reported according to the IRS tax calendar and using the correct forms.

Business Income Taxes

Business owners--or the business themselves--are taxed according to the income from their business, based on the business structure they have. For example, owners of a sole proprietorship note all business profits and losses on their personal taxes. Similarly, owners of a Limited Liability Company (LLC) have the “pass-through” option that enables them to note business profits and losses on their personal taxes. The owners of a corporation, however, must file separate business taxes, because the corporation represents its own legal entity. Owners of a corporation (usually called “shareholders”) thus pay taxes twice: They file personal income profits and losses on their individual statements, and they also file business profits and losses on the corporation’s statement.