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Module 7: Tax Planning

Employment taxes

In addition to federal income taxes, you may also need to withhold taxes on employee wages and set aside a portion of your own revenue to pay the employer portion of payroll taxes. It’s important to manage your payroll accurately so you can compute and collect the appropriate taxes. These must be paid to the respective agencies monthly, quarterly or annually. Employment taxes vary depending on the type of business, location and other factors. Before you hire employees, you’ll want to register as a new employer with the IRS and the state Employment Security department.

Here are some of the federal employment tax forms you need to file as an employer:

  • Employer Annual Federal Unemployment (FUTA) Tax: You will file Form 940 with the IRS annually to report the amount of FUTA for your employees.

  • Employers Quarterly Federal Tax Return: Form 941 is used by employers to report employment taxes, withholding amounts, deposit amounts and amounts due to the IRS. This form includes the total number of employees you have, total pay for the quarter, amount withheld from the employees’ wages and taxable wages for the period. The state will have additional employment tax levies, forms and payment processes to cover things like disability insurance and unemployment.
  • W-4 Form: This form is completed by an employee to indicate their individual tax situation (exemptions, status, etc.) to their employer. This information allows the employer to withhold the correct amount of tax from an employee’s paycheck.
  • W-2 Form: This is the form that an employer must send to each employee and the IRS at the end of the year. The form reports an employee’s annual wages and the amount of taxes withheld from their paycheck.
  • Form 1099-MISC: While you use the W-2 Form to pay an employee, you use this form to pay independent contractors that do work for your business. Generally, if you pay more than $600 during the year to someone other than a corporation in the course of your trade or business, you must file Form 1099-MISC showing how much you paid to the person. To report payments on this form, you need to obtain the person’s tax identification number, either their Social Security Number or EIN.

State and local taxes

In addition to federal taxes, you need to pay your share of state and local taxes. Because tax obligations and rates are based on the type of business you have and its location, we’re not going to spend too much time on it here. We highly recommend that you visit the Department of Revenue’s site to learn more about these tax obligations. You may also need to apply for permits and licenses in a particular community or county.

If you sell goods, you may need to collect sales taxes from your customers. Sales tax has two parts – the state sales tax and the local sales tax. When you file your state taxes, the correct local sales tax rate is calculated and reported in the form you file with the Department of Revenue.