Taxes

In addition to paying your employees' salaries and benefits, you will also have to pay half of their payroll taxes. Payroll taxes include FICA and FUTA taxes. FICA taxes, named for the Federal Income Contributions Act, are tax revenues that are paid to Social Security and Medicare.

In addition to paying half your employees' payroll taxes, you must also withhold their share of FICA taxes from their income. You withhold FICA taxes when you process your payroll for a pay period. Most types of compensation, including tips, bonuses, and commissions, require withholding for payroll taxes.

^{The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.}

You will likely owe federal unemployment (FUTA) taxes. These taxes are paid into a federal fund for unemployment compensation. Since employees do not pay federal unemployment taxes, you do not withhold them from income.

You report federal unemployment taxes on IRS Form 940 or Form 940-EZ. For more information on calculating federal unemployment taxes, see IRS Pub. 15. For additional information on the federal unemployment tax, see Chapter 23 of the U.S. tax code.

^{The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.}

Here are some of the basic issues of withholding income and payroll taxes when you pay your employees:

• Withholding Taxes: When you pay your employees, you're responsible for withholding certain taxes from their wages. These taxes fund programs like Social Security (OASDI) and Medicare. As an employer, you also contribute to these taxes.
• Additional Medicare Tax: High-income employees might have to pay an extra Medicare tax, as mandated by the Affordable Care Act.
• Calculating Income Tax Withholding: There are two main methods for calculating how much income tax to withhold: the wage-bracket method and the percentage method. The wage-bracket method involves using tables based on pay frequency, marital status, and allowances claimed. The percentage method uses general and specific tables provided by the IRS.
• Employee's Withholding Allowance Certificate (W-4): Employees fill out a W-4 form, which helps you determine the correct amount of tax to withhold from their paychecks. If an employee wants to adjust this amount, they can submit a new W-4.
• Tax Reporting: As an employer, you need to report the taxes you've withheld from employees' wages. This is typically done quarterly using forms like IRS Form 941 or Form 944.
• Tax Deposit Schedule: You're required to deposit the taxes you've withheld with the IRS either monthly or semi-weekly, depending on the total amount owed.
• Non-U.S. Citizen Employees: If you hire non-U.S. citizens, there might be additional or different rules to follow for tax withholding.
• Timely Deposits: If your tax liabilities are significant within a short period, you must deposit them promptly. However, if your tax liabilities are relatively small, you might qualify to file certain forms annually instead of quarterly.

^{The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.}

When paying taxes to the IRS, you need to submit payroll and non-payroll taxes.

Payroll Taxes:

• Include Social Security (FICA) and unemployment (FUTA) taxes.
• Reported quarterly on IRS Form 941, due by the end of the month following each quarter (e.g., April 30 for the first quarter).
• Form 941 can be filed electronically. Small employers with low tax liability may file Form 944 annually instead.
• For unemployment taxes, deposit if you owe more than $500 in a quarter and report annually on IRS Form 940 by January 31 (or February 10 if all payments were made on time).

Non-Payroll Taxes:

• Include taxes withheld on pensions, annuities, military retirement, gambling winnings, and backup withholdings.
• Reported annually on IRS Form 945, due January 31 (or February 10 if all payments were made on time).

Payment Schedules:

• Use a monthly or semi-weekly deposit schedule based on your tax liability during the lookback period (the previous 12 months ending June 30).
  • Monthly schedule if your total taxes were $50,000 or less.
  • Semi-weekly schedule if more than $50,000.
• Small businesses with less than $2,500 in quarterly tax liability can pay with Form 941.

Accuracy-of-Deposits Rule:

• You can postpone a portion of your tax payments if you meet certain conditions.
  • Monthly depositors can delay payments until filing Form 941.
  • Semi-weekly depositors must pay by the next deposit due date.
• The postponed amount must not exceed $100 or 2% of your total tax liability.

Penalties apply for late payments. Taxes must be deposited at an authorized financial institution using the IRS’s EFTPS system.

^{The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.}

In addition to withholding payroll and income taxes from employees' pay, you might also make other deductions. With payroll deductions, employees authorize you to take a set amount from their salary each pay period.

For example, if you offer a retirement plan, you deduct money to fund employees' retirement accounts. Usually, a plan administrator ensures compliance with ERISA (the federal law for tax-qualified retirement plans) and tracks contributions. They also provide reports on contributions and investment performance.

If you offer a Section 125 plan, also known as a cafeteria plan, you make regular payroll deductions for things like dependent care and healthcare accounts. You might hire a third-party administrator to manage this, though you can do it yourself to save costs.

Offering tax-qualified retirement or Section 125 plans benefits employees by helping them save for retirement or immediate needs while reducing their taxes, giving them financial security. It also benefits you financially by lowering the payroll taxes you pay. For example, if your monthly payroll is $100,000 and you deduct $15,000 for a cafeteria plan, you owe payroll taxes on $85,000 instead, saving you around $14,000 annually.

If you match contributions to a retirement plan, you can deduct these contributions as a business expense, lowering your income tax bill.

Additionally, offering these benefits can lead to more satisfied and loyal employees. For more information, see IRS Pub. 15.

^{The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.}

When selling a stake in your business, consider these key factors:

• Using Stock as Compensation:
  • You can use company stock to attract and compensate employees, often through stock options. These options vest over time based on an agreement.
• Raising Capital by Selling Stock:
  • Selling shares can raise funds and improve your debt-equity ratio. This helps maintain financial flexibility and reduce interest payments.
  • You can sell a minority stake to a passive investor or a venture capital firm. If you want to remain in control, retain a majority stake.
• Future Ownership Plans:
  • Decide if you’ll share managerial responsibilities, leave the company, or retire. Communicate these plans to stakeholders early.
  • Consider having your financial statements audited and your business appraised for a smoother transition.
• Tax Consequences:
  • Selling shares results in capital gains, reported on Schedule D of IRS Form 1040.
  • Qualified small business stock may be eligible for tax benefits like Section 1045 rollovers and Section 1202 exclusions, which can reduce taxable gains. For details, see IRS Pub. 550.

Planning ahead and communicating your intentions can help ensure a successful transition and succession.

^{The above information is educational and should not be interpreted as business advice. Your actual business plan may differ in structure and level of detail. For advice that is specific to your circumstances, you should consult a financial or tax advisor.}

Here's a brief overview of capital gains tax and its potential impact if you sell some of your small business shares:

• Capital Gains: The stock you own in your business is a capital asset. If it increases in value, you owe taxes on the gain.
  • For example, if you buy buy 100,000 shares at $10 each and sell 20,000 shares at $15 each a year later, the amount of capital gain is $100,000.
• Basis Calculation: Basis is the cost of acquiring your shares. You can add costs like legal fees to your basis.
• Valuing Shares: Small company shares are harder to value. You might use your investment amount or get a professional appraisal.
• Capital Gains Tax Rates: If you sell shares at a profit:
  • Qualified small business stock: 28% on taxable gains.
  • Other stock held for at least one year: 0%, 15%, or 20%, depending on income.
• Tax Breaks: Qualified small business stock may allow you to roll over gains or exclude up to 100% of gains from taxes.
• Offsetting Gains and Losses: Offset capital gains with capital losses. Match long-term gains with long-term losses, and short-term with short-term. If losses exceed gains, offset up to $3,000 of ordinary income annually and carry over unused losses to future years.
• Non-Taxable Events: Transferring property to your business for stock is usually non-taxable if you control at least 80% of the company. Transferring stock to a spouse is also non-taxable, and they retain the original basis.

Forms & Publications
You can find details on capital gains taxes in IRS Pub. 544 and Pub. 550. For additional information on calculating basis, see IRS Pub. 551.

You report capital gains on IRS Schedule D of Form 1040. To record a sale of small business stock that takes advantage of the ordinary-income loss limit of $100,000 under Section 1244, use Part II, Line 10 of Form 4797.

^{The above information is educational and should not be interpreted as business advice. Your actual business plan may differ in structure and level of detail. For advice that is specific to your circumstances, you should consult a financial or tax advisor.}

Handing over the reins of your business can mean various things related to management and ownership decisions:

• Management Decisions:
  • Sharing Decision-Making: Involve other managers in decision-making.
  • Recruiting a Successor: Find someone to take over all decisions.
• Ownership Decisions:
  • Transferring Stake: Give part or all of your business to a spouse, family member, or charity.
  • Selling Stake: Sell your entire stake to a new buyer.

Finding a Successor
Finding the right successor with the skills and experience to run your business is crucial. Small business owners often have a hands-on approach, making it challenging to transfer responsibilities. To avoid problems, start early in identifying and training potential successors.

Transferring Ownership to a Spouse
Transferring your stake to a spouse is generally non-taxable, but you'll need to calculate a new basis for the property, usually using the fair market value or your original basis. For detailed information, refer to IRS Pub. 551.

Donating Shares to Charity
If you donate shares to a charity, you must itemize deductions to claim them. For more details, see IRS Pub. 526. You can also leave stock to beneficiaries in a will or trust. The annual exclusion for 2022 allows up to $15,000 per beneficiary tax-free. For more on this, check IRS Forms 706 and 709.

Selling to an Investor or Employees
Selling your business to an outside investor or a group of employees lets you cash out and enjoy retirement. This sale will likely trigger capital gains taxes. If you only sell part of your interest, expect a reduced role in the business. 

Some of the main tax forms you may be required to complete when you liquidate some or all of your stock include:

• Form 6252. IRS Form 6252 is used to report installment sales. An installment sale allows you to earn annuity income and defer income taxes due on the sale.
• Form 8824. IRS Form 8824 is used for reporting like-kind exchanges. A like-kind exchange is a non-taxable exchange of property for similar property. With like-kind exchanges, you owe capital gains tax when you sell the property you are acquiring as a result of the exchange. Stock and partnership interests are not eligible for like-kind exchange tax deferral.
• Schedule D. Generally, Schedule D of IRS Form 1040 is used to report capital gains or losses. You may also have to complete Form 4797 to report gains earned on certain transactions.

^{The above information is educational and should not be interpreted as business advice. Your actual business plan may differ in structure and level of detail. For advice that is specific to your circumstances, you should consult a financial or tax advisor.}

If you want to leave stock or property to your loved ones or charities, you can use a will or a trust. Trusts help avoid the costly and time-consuming probate process.

Trusts are recommended if you have substantial assets as part of estate planning.

The estate tax has changed over the years:

• The Economic Growth and Tax Relief Reconciliation Act of 2001 eliminated the estate tax in 2010.
• The 2010 Tax Relief Act reinstated it.
• The Tax Cuts and Jobs Act of 2017 doubled the exclusion limit for 2018-2025.

For 2022, the exclusion limit is $12.06 million with a maximum tax rate of 40%. Here's a summary of the limits and rates over the years:

Year	Exclusion Limit	Max Tax Rate
2005	$1.5 million	47%
2006	$2 million	46%
2007	$2 million	45%
2008	$2 million	45%
2009	$3.5 million	45%
2010	Repealed/$5 million	35%
2011	$5 million	35%
2012	$5.12 million	35%
2013	$5.25 million	40%
2014	$5.34 million	40%
2015	$5.43 million	40%
2016	$5.45 million	40%
2017	$5.49 million	40%
2018	$11.18 million	40%
2019	$11.4 million	40%
2020	$11.58 million	40%
2021	$11.70 million	40%
2022	$12.06 million	40%

Estate planning is crucial to protect your wealth. For more information, visit the National Association of Financial & Estate Planning (NAFEP) website.

In 2010, the elimination of the estate tax also removed the stepped-up basis rule, which affects how capital gains are taxed on inherited property. Effective estate planning can help you anticipate these tax changes.

Using a trust ensures your assets go to your chosen beneficiaries. Life insurance can also help cover estate taxes, preventing your beneficiaries from needing to sell inherited assets.

^{The above information is educational and should not be interpreted as business advice. Your actual business plan may differ in structure and level of detail. For advice that is specific to your circumstances, you should consult a financial or tax advisor.}