If you're launching a design company in the U.S., you need to be aware of some important tax issues. Here's what you need to know to stay out of trouble!
Personal income tax
Let's start with you as an individual. Earlier in your career, you may have been an employee in someone else's firm. While you were on staff, federal and state income taxes were withheld from your paychecks. Social Security and Medicare amounts were also withheld. If you're now on your own as an independent contractor, it's your responsibility to make these payments directly to the government. You must do this on a quarterly basis. To learn how, visit the Internal Revenue Service site and download the PDF file for publication 583, "Starting a business and keeping records." It's a good overview of tax issues for entrepreneurs, and it explains the process of making the required quarterly payments.
One more note about Social Security and Medicare: while you were on staff, you may not have been aware that your employer was required to match the amounts withheld for these two items. Now that you're self-employed, you're responsible for paying both the employee and employer portions. This is referred to as the self-employment (or SE) tax.
If you're a one-person company, income taxes will be reported under your personal tax ID number (your Social Security number). When you decide to hire additional people, two new ID numbers will be necessary for processing the payroll. You need to apply for a Federal Employer Identification Number (EIN) from the IRS and a State Employer Identification Number from your state government. Taxes will be withheld from everyone's checks and passed on to the government using these employer numbers. Your company will also be responsible for other employer taxes such as federal and state unemployment. Your accountant or payroll service will help you handle these correctly.
Taxes on business profits
Separate from the payroll-related taxes that we've been discussing, the company itself may have to pay federal taxes on annual profits. In the U.S., your choice of ownership structure will affect this. In general, sole proprietorships, partnerships, and limited liability companies do not pay a separate tax on profits, but corporations do. To choose the most appropriate type of ownership structure, get expert advice from your accountant and attorney. In addition to the federal government, many states also impose an annual tax on business income. At the very least, your company will be required to file an informational return. Then, depending on your legal structure, a tax payment may be due to the state.
Quite separate from business profits, many states also impose a tax on individual sales transactions. Your design company may need to register for a sales tax license (also called a seller's permit). This usually applies to businesses involved in selling or leasing tangible property but, in some states, sales tax applies to services as well. The license lets you collect any applicable sales tax from your customers and pass it on to the state. Currently, there are five states that do not impose a general sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. However, it's important to note that individual cities and counties within those states may have the authority to impose their own local sales taxes, so you'll have to check the requirements for your exact location.
Other tax requirements
Lastly, business licenses or permits may be required for you to operate legally in your city or county. When you register for these, the office of the assessor or treasurer will tell you about any local taxes. They may apply to property, fixtures and equipment, or gross receipts. When it comes to any kind of tax, ignorance is no defense. You need to find out what's required and make sure your business is in full compliance!
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Shel Perkins is a designer, educator and consultant to creative firms. His book 'Talent Is Not Enough: Business Secrets For Designers' is now available from New Riders/Peachpit Press. To contact Shel with questions and comments, please e-mail us at firstname.lastname@example.org