Like it or not, the government is your business partner. And, as your partner, it receives a portion of your profits — even before you do. However, government can also help you make a profit through the Small Business Administration, Department of Commerce, state corporate divisions, and numerous other business services. Remember, the government is your partner in your consulting business.
Types of Taxes
The owner-manager of a small business plays two roles in managing taxes. In one role, you're a debtor. In the other, you may be an agent or tax collector. It's important that you understand your obligations as a business owner.
As a debtor, you're liable for various taxes and you pay them as part of your business obligations. For example, each year, you owe federal income taxes, which you pay out of the earning of your business. Other tax debts include state income taxes and real estate taxes.
As an agent, you collect various taxes and pass the funds on to the appropriate government agency. If you have employees, you deduct federal income, social security insurance, or FICA taxes, and, in some states, you collect state income taxes from the wages of your employees. If your state requires sales tax on your consulting business, you will collect it from your clients and periodically send it on to the state as required by law.
Paying taxes is a necessity. Some of what you get for your taxes is assistance in finding ways to legitimately avoid taxes. Don't pay more than you absolutely need to. Use the services of the Internal Revenue Service (
If you are a sole proprietor, you pay your income tax just like any other individual citizen. Your income, expenses, and profit or loss are calculated on Schedule C, which is filed with your annual Form 1040. A partnership files its own tax forms and passes the profits on to the partners for filing on their personal income tax forms. A corporation files on IRS Form 1120 or short form 1120A. Sub-chapter S corporations file on IRS Form 1120S. Self-employment tax — social security insurance for the self-employed — is reported on your IRS 1040 form using Schedule SE.
Individual proprietors and partners are required by law to put the federal income tax and self-employment tax liability on a pay-as-you-go basis. That is, you file a Declaration of Estimated Tax (Form 1040 ES) on or before April 15, then make payments on April 15, June 15, September 15, and January 15.
Income tax returns from a corporation are due on the fifteenth day of the third month following the end of its taxable year, which may or may not coincide with the calendar year. To find out more about your tax obligations, contact your regional IRS office or visit its website for the following publications, as appropriate:
Tax Guide for Small Business (Publication 334)
Guide to Free Tax Services (Publication 910)
Your Federal Income Tax (Publication 17)
Employer's Tax Guide (Circular E)
Taxpayers Starting a Business (Publication 583)
Self-Employment Tax (Publication 533)
Retirement Plans for the Self-Employed (Publication 560)
Tax Withholding and Estimated Tax (Publication 505)
Business Use of Your Home (Publication 587)
In addition, there are a number of federal forms you'll need for good record keeping and accurate taxation:
Application for Employer Identification Number (Form SS-4) if you have employees
Tax Calendars (Publication 509)
Employer's Annual Unemployment Tax Return (Form 940)
Employer's Quarterly Federal Tax Return (Form 941)
Employee's Withholding Allowance Certificate (W-4) for each employee
Employer's Wage and Tax Statement (W-2) for each employee
Reconciliation/Transmittal of Income and Tax Statements (W-3)
Instructions for Forms 1120 and 1120A for corporate taxes
Managing costs means establishing a profitable budget and sticking to it. This process requires accurate recordkeeping, the topic of the next chapter.