Tax Info Potential Business Owners Need to Know

Employment taxes are part and parcel of running a small business. One important aspect of becoming a small business owner, is to acquire a 'Federal Employee Identification Number', otherwise referred to as an 'EIN'.

An EIN, alternatively known as a Tax ID number, is a federal identification number issued by the IRS. It is used to identify your business. As a sole proprietor, however, you could opt to list your social security number on all of your government forms/other official documents, instead. You are legally required to use either your EIN, or your SSN; although many small business advisors would encourage you to apply for an EIN, preferably, for the purpose of identifying your business. For assistance in determining your need for an 'EIN', click here.

There are several federal, state, and local taxes that you should be aware of. It is your responsibility, as an employer, to withhold taxes (which leaves what is commonly known as 'net' income) out of the 'gross' income that you pay your employees.

These are employment taxes that you may or may not be familiar with:
- Federal Income Tax Withholding
- Social Security and Medicare Taxes
- Federal Unemployment Tax Act (FUTA)
Federal Income Tax contributes to Social Security, and Medicare. To calculate the amount that should be withheld from your employees paychecks, you should use the employees form W-4.

Social Security tax covers the old-age/survivors/disability insurance portion of 'FICA' (Federal Insurance Contributions Act). Medicare tax covers the Hospital Insurance portion of 'FICA'. You then pay an equal amount yourself, after withholding part of these taxes from your employees gross income.

To report Federal Income Taxes/Social Security/Medicare Taxes, you should use the following:
- Form 941 Employers Quarterly Federal Tax Return
- Form 943 Employers Annual Federal Tax Return for Agriculture Employees (for use by farm employers)