Accounting and Finance for Your Small Business Second Edition_12

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Accounting and Finance for Your Small Business Second Edition_12 Reporting CHAPTER 9 What Wages Are Subject to Taxes? The Internal Revenue Service (IRS) makes available publications on what constitutes wages for the purpose of tax liabilities. Essentially, wages subject to taxes include all compensation given to an employee for services per- formed. The pay may be in cash, vacation allowances, bonuses, and commissions. Other special considerations to be checked in current IRS publications include: • Partially exempt employment • Moving expenses • Fringe benefits • Taxable tips Depositing Taxes. Federal deposit coupon books (Form 8109) are used to deposit paid and withheld taxes. The preprinted coupons are basically a form with boxes for the amount of each tax paid, the FEI number, and the tax period against which the payment is being made. The coupon is mailed or delivered along with a single payment covering the taxes to a federal reserve bank (serving the employer’s area) or, more likely, to an authorized financial institu- tion. The frequency of payment depends on the amount due at the end of the month; you should determine the required deposit peri- ods in consultation with an accountant. Filing Returns and Reporting Taxes. FUTA taxes are reported quarterly, using Form 940. The deposit is due by the last day of the first month after the quarter. If the amount due for any quarter is less than $100, it may be carried over and paid in the next quarter’s report. For income taxes withheld and for Social Security (FICA) taxes, the employer files a quarterly report on federal Form 941. There are some exceptions to this rule related to agricultural employers, household employers, state and local governments, and some others. Willful failure to file returns and pay taxes when due will result in criminal and civil penalties. The same is true for willful filing of false or fraudulent returns. In some cases in which income and Social Security taxes are not withheld and not paid to the IRS, individuals 257 Evaluating the Operations of the Business SECTION III of the corporation or partnership may be held individually liable for the payment of these taxes along with a penalty of up to 100 per- cent of the taxes wrongfully uncollected. Wages and Tax Statement. By January 31 of each year, an employer must provide each employee a statement of wages and taxes. This report, form W-2, includes all wages, tips, other com- pensations, and withheld income and Social Security taxes. Other payments may be included when applicable: bonuses, vacation allowances, severance pay, moving expenses, taxable fringe bene- fits, some kinds of travel expenses, and others. Income Tax Return Tax rules vary according to whether the operation of the business is as a sole proprietorship, a partnership, a regular C corporation, or an S corporation. These tax rules may affect how the firm carries out its business activities. Sole Proprietorships. In order to qualify as a sole proprietorship, you must be self-employed and the sole owner of an unincorpo- rated business. Schedule C is filed with a federal Form 1040 (per- sonal tax return) by April 15 of the year following the fiscal year reported. In a sole proprietorship, there is no tax effect for taking money out of the business for personal use or transferring personal money to the business. However, you should set up and keep separate accounts to keep track of identifiable business expenses and per- sonal withdrawals. Failure to keep adequate business records has been the downfall of many sole proprietorships. Partnerships. A partnership is the relationship between two or more persons for the purpose of carrying out a trade or business for a profit. Each person contributes money, property, labor, or skill, expecting to share in the profits or losses of the enterprise. If a husband and wife carry on a business together and expect to share in the profits and losses, they may come under the definition of a partnership for the purposes of taxes. This may occur even by 258 Reporting CHAPTER 9 operation of law, where the husband and wife have not executed a form of partnership agreement. Income from a partnership is reported on Form 1065, U.S. Partnership Return of Income. Also included will b ...