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Informed tax management can help startups and small businesses comply with tax obligations while optimizing credits and available deductions. The year 2020 impacted many small businesses, causing some to close, due to lack of adequate available cash to continue operations. Other small businesses have realized some relief by utilizing government aid and judicious planning to keep growing the business.
As rebuilding and consolidating continues, it is vital to apply consistent and reliable planning at the beginning of the financial year to help businesses ensure financial sustainability.
Prudent tax planning is a critical aspect of financial management and ensures businesses meet their tax obligations on time and without penalties. Consistent accounting and bookkeeping practices and planning in daily operations help businesses maximize tax deductions and credits.
The tax forms reviewed below are important and should become part of a small business tax checklist.
Form SS-4 is an application for Employer Identification Number (EIN), a nine-digit number that serves to identify the business in IRS records when reporting taxes. The EIN is critical to businesses because it establishes the tax account for the business and serves as an identification record to the IRS. All businesses, regardless of their structure, must apply for an EIN if they are within the US, even if they have a single employee.
There are various 1099 Forms, including 1099-MISC, 1099-C, Form 1099-INT. These are used to report income received from outside salary, wages, or compensation. Form 1099-C is used to report canceled debt and Form 1099-INT is used for reporting earnings from interest. Form 1099 informs the IRS about the different types of earnings — not part of wages or salaries — made by taxpayers throughout the year. The IRS compares income reported by taxpayers (through other paperwork) to information provided by Form 1099 submissions. Payers, including small businesses hiring independent contractors, need to fill out Form 1099 and send them to payees as well.
According to the IRS, issuers of these forms must send one copy of Form 1099 to the IRS and another to the taxpayer. Form 1099-MISC needs to be sent out to each person who has been paid at least $10 in royalties, $600 in rent, or medical and health care payments, prizes and awards, etc.
Form W-2 must be filled by businesses that employ individuals and pay remuneration including income, social security, and Medicare tax withholding. This applies to employees who may be related to the business owner. The IRS needs employers to file a Form W-2 for employees whose income tax would be withheld if the employee does not claim exemption from withholding (Form W-4, Employee’s Withholding Allowance Certificate).
Form 940 is used by employers to report the annual Federal Unemployment Tax Act (FUTA) payment. FUTA taxes fund unemployment compensation. There is also state unemployment tax applicable in some cases. For employers who pay state unemployment taxes as well, there is a tax credit available which can be utilized by them at tax time.
There are a number of forms that are used to file business expenses. Domestic corporations need to use the Form 1120 to calculate their tax liability or the amount of tax they owe as well as to report their incomes, gains, losses, deductions, and credits.
There are different kinds of forms for different organizations, such as Form 1120 –L which is used by life insurance companies to calculate their tax liability as well as to report their income, gains, deductions, etc. Similarly, Form 1120-S is used by S Corporations, Form 1120 – W is used by corporations to figure out their estimated tax payments, etc.
Benefiting from professional accounting services tax insights
Small business tax forms can be confusing without a clear understanding of accounting principles. Tax management and optimizing deductions and credits can greatly increase a business’s cash savings. For startups and small businesses whose owners are typically multi-tasking, identifying and filling relevant tax forms may prove to be difficult. This holds true for bookkeeping and CPA businesses who possess in-depth understanding of the taxation system but lack the time to attend to their own business needs when filing taxes.
Professional accounting expertise is essential in determining tax obligations and optimizing deductions. Typically, professional support brings unparalleled industry experience, helps streamline the process of bookkeeping and record-keeping and creates hassle-free tax filing and reporting.
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