Don't overlook these!
Updated for 2012
Anyone who has ever received a paycheck knows there are taxes withheld from their gross pay. These taxes are referred to as federal withholding taxes and generally include:
UPDATE for Employees and Employers: Normally, the total social security tax rate is 12.4%, with the employer and employee each paying one-half, or 6.2% each. However, for 2012 (and 2011), the employee's share of the social security tax was reduced to 4.2%, a 2% reduction. The employer's share remains unchanged at 6.2%. Medicare taxes remain unchanged. The total Medicare rate is still 2.9% (1.45% employer and 1.45% employee). Beginning in 2013, the employee's rate goes back up to 6.2%.
If you're self-employed, see the update in the box below.
State income taxes will also be withheld unless your state doesn't have a personal income tax.
The employer is required to remit withheld taxes to the appropriate government agencies.
An employer is also liable for employment taxes.
An employer is liable for the following federal employment taxes:
UPDATE for Self-Employed Persons: For 2012 (and 2011), the employee's share of social security tax was reduced 2%, to 4.2% (.042).
Figuring Your Self-employment Tax Deduction
Because of the 2% reduction in the social security tax for employees, a self-employed person must perform a special computation to figure the self-employment tax deduction, which is entered on the first page of Form 1040.
State unemployment taxes (SUTA): The employer pays state unemployment taxes. The employee does not pay this tax.
A disregarded entity is simply an entity that is NOT considered separate from its owner or from another entity. A sole proprietorship and a qualified subchapter S subsidiary (QSub) are examples of disregarded entities.
In other words, for tax purposes, the IRS disregards certain entities as being separate taxable entities.
For example, a corporation and its shareholders are two separate taxable entities. The corporation files Form 1120 and the shareholders file Form 1040.
The owner of a sole proprietorship files Form 1040. Net income or loss is carried from Schedule C to Form 1040. Only one return is required which takes into account business income or loss and non business income and deductions.
If you own an LLC yourself (a single-member LLC), your LLC is automatically treated as a sole proprietorship for federal tax purposes and is therefore, considered a disregarded entity.
However, if you make an election for your single-member LLC to be taxed as a corporation, then the LLC would not be considered a disregarded entity for federal tax purposes. Form 1120 would be filed to report net business income or loss and Form 1040 would be filed by the LLC member (owner).
Qualified Subchapter S Subsidiary (QSub):
A QSub is disregarded as a separate entity.
If you own two S corporations, you can make an election for one of them to become a QSub.
For example, S corporation A makes an election for S corporation B to become a QSub. Now, both entities are treated as a single entity for tax purposes.
Only one Form 1120S would be filed instead of two separate returns. For example, if S corporation A has gross sales of $50,000 and S corporation B (the QSub) has gross sales of $100,000, gross sales of $150,000 would be reported on one Form 1120S by S corporation A.
This arrangement can be advantageous since it cuts the cost of accounting and tax preparation fees.
For example, accounting is simplified because there are no intercompany transactions to deal with. Tax preparation is simplified because only one tax return has to be prepared instead of two separate returns (one for each entity).
Now that the terminology is out of the way, the following information covering the rules for employment taxes for 2008 and 2009 will make more sense.
Under Notice 99-6, employment taxes for employees of a qualified subchapter S subsidiary (QSub) or an entity disregarded as an entity separate from the owner under Regulations section 301.7701-2(c)(2) may be reported and paid by either:
Single-owner disregarded entities and qualified subchapter S subsidiaries (QSubs) are treated as separate entities for employment tax purposes.
This means eligible single-member entities that have NOT elected to be taxed as a corporation may no longer elect to treat employment taxes for employees as a direct liability of the owner, as was the case in 2008 and prior tax years.
In other words, in 2008 and prior years, the owner was allowed to use his/her own name and tax identification number on employment tax returns.
Beginning January 1, 2009, employment taxes on wages paid to employees by eligible single-member entities must be reported and paid under the entity's own name and tax identification number NOT the name and TIN of the owner.
Your can get an employer identification number (EIN) for your LLC online.
Here's the IRS link: Online application for EIN.
For more information, see Disregarded entities and qualified subchapter S subsidiaries in the Introduction section of Pub. 15 (Circular E), Employer's Tax Guide.
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