Self Employment Taxes and Legal Problems

Generally speaking there are four primary types of small business taxes including:

• income tax
• self-employment tax
• employment taxes
• excise taxes 

A small business owner is responsible for filing the proper forms with the IRS on an annual basis and meeting all of the various self employed tax reporting requirements.

Reporting Self Employment Income Tax

Income tax is a small business tax that applies to all businesses, with the exception of partnerships, and requires them to file income tax returns for the business every year.  For business formed as partnerships, an “information return” is filed instead of an actual annual tax return. The Self-Employment Tax applies to individuals who are self-employed, and the tax imposed in usually a social security and Medicare tax.  The self-employment tax is different than income tax for a self-employed individual.  Self-Employed taxpayers file a Schedule SE as part of their 1040 and include earnings and other applicable information.

Additionally, Excise Tax is owed by the small business owner as a small business tax and applies to businesses that: manufacture or sell specific products; operate specific kinds of businesses; use specific kinds of equipment, facilities, or products; and receive payment for specific services.

Employment and Payroll Taxes

Employment Taxes apply to individuals who have employees, the employer has specific tax responsibilities and payment obligations.  Employers must pay social security and Medicare taxes, Federal income tax withholding and Federal unemployment (FUTA) taxes as part of their employment tax burden.

More on Payroll Tax Problems

Employer Tax Liability

Employers are also responsible for paying the small business tax related to payroll for employees.  There are two types of payroll taxes that employers may be subject to: withholdings from the employee or withholding from the employer for each employee.  Pay-As-You-Earn (“PAYE”) and Pay-As-You-Go (“PAYG”) refers to the employer withholding taxes from each employee as the employee earns income.  Employer Funds taxation refers to the facts that taxes may also be paid directly from the funds of an employer on a fixed price per employee basis or based on a percentage of employee earnings.

Self Employment Tax Problems

Classifying Employees vs. Independent Contractors

Common legal issues related to small business tax are based on how the small business owner classifies the people who work for them– it is important to establish whether employees of a business are actually considered “employees” or “independent contractors” for tax purposes.   Since employers must pay social security and Medicare taxes, Federal income tax withholding and Federal unemployment (FUTA) taxes for employees but not for independent contractors, the classification of workers can be an important business decision.  As part of a determination over whether an individual is an employee of an independent contractor, a series of factors related to the degree of control an employer has over the individual as well as the general independence of the individual.  Important areas to look at include the behavior of the worker and whether the employer actually controls the way the individual does their job; whether the financial aspects of individual’s job are controlled by that specific employer or another employer/manager; and the type of employment relationship that exists (i.e. whether the individual has “employee” benefits such as pension plans, vacation days, etc.)

Help from a Tax Lawyer for Employment Tax Issues

If you are a small business owner or a self-employed sole proprietor, it is in your best interest to consult with a tax attorney related to employment issues.  The mistake of wrongfully classifying a worker as an independent contractor instead of an employee can lead to significant tax consequences for the employer, and seeking professional legal help is the best way to prevent such costly mistakes.  There are many attorneys skilled in tax law and finding solutions for every size business and venture and every business owner should utilize the expertise of an expert in their area.