Who Pays Income Tax?
Anyone who earns income is subject to federal income tax. If you work for or are an employer,
it is the employer's responsibility to deduct a certain portion of wages as withheld income tax and send it to the
Internal Revenue Service (IRS). If you are self-employed or own a business, it is your responsibility to report your
income to the IRS and pay any taxes due.
How Is Income Tax Figured?
The IRS provides free tax forms, instructions, and publications to help you figure your income tax.
As a business owner, you must keep accurate records of your company's income and expenses. You are only taxed on the net
income (or taxable income) that is left after business expenses are deducted. A certain percentage of each dollar
of your taxable income is the tax you owe on that dollar. The percentages change depending on your total taxable income.
These different percentages are referred to as tax brackets.
What Business Expenses Are Deductible?
Since your expenses reduce your taxable income, it is very important to track them. These are
examples of some of the common small business expenses that are usually deductible:
- Costs of the materials and labor that go into the merchandise you sell
- Advertising
- Business transportation
- Wages paid to helpers (contractors) or employees
- Interest on business loans
- Fees for legal and professional services
- Business rent, utilities, and insurance
- Supplies and small equipment items
- Repairs an maintenance
- Postage and shipping
- Taxes and licenses
Do I Pay Self-Employment Tax?
Even if you are not otherwise required to file an income tax return, you must file if your net earnings
from self-employment are $400 or more. This is because you must pay self-employment tax. This tax pays for your benefits under
the social security system, giving you the same social security and Medicare benefits available to other wage earners (who
have social security tax and Medicare tax withheld from their paychecks).
What Are Some of the Other Employee-Related Taxes and Financial Obligations of Employers?
As an employer, you are responsible for:
- Social Security (FICA) and Medicare taxes
- Unemployment (FUTA) tax
- State Disability Insurance (in some states)
- Workman's Compensation Insurance
What About State Taxes?
Most states require businesses to withhold state income taxes of employees, as well as requiring
self-employment individuals and business owners to file state income tax returns. Many states also levy state disability
insurance, sales taxes on ratail sales, and business property taxes on tangible property owned by the busisness (such
as office furniture, machinery, and equipment) and certain kinds of intangible business property (such as promissory notes
or accounts receivables).
A good place to find out what taxes your state requires you to pay is to visit the Web site of
site of The Federation of Tax Administrators, where you will
find links to all state tax agencies. You will also find your state tax agency listed in the government pages of your
phone book.
More Tax Questions?
For help with federal income tax, visit the Web site of the
IRS or call (800) 829-1040. Two very helpful publications you can request from the IRS are:
- Tax Guide for Small Business
- Student's Guide to Federal Income Tax
You also should seek professional advice from a lawyer specializing in tax law, a certified
public accountant (CPA), or an enrolled agent (EA). An EA is a tax expert who has been approved by the IRS to provide
tax advice and prepare tax returns.
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