What You Need to Know About Federal Income Tax
January 29, 2019
January 29, 2019
Federal Income Tax is the money that the US Government takes from you, your business, and your employees. That tax is then used to fund national infrastructure in the form of benefits and services. For businesses, federal income tax can be a confusing and complex matter, but it remains one of the most important things for all business owners to get right. Failure to pay the right federal income tax can have unpleasant repercussions, and payments are actually very easy to get right.
If you’re concerned about the upcoming tax period and you arenâ€™t sure exactly what federal income tax is and how it affects you, then this guide will make things a little clearer.
This is by far the most common form of federal taxation. There are others, such as gift tax and estate tax, but income taxation works slightly differently. Any person or company that earns an income will have to pay income tax.
If you receive any property, have been financing a business acquisition, or make any money independent of your business, it is still taxable. While this may seem like a system designed to punish those that make money, there are actually a wide variety of tax credit schemes, options for making tax deductions, and even exclusionary rules that can help you reduce the amount of federal income tax that you ultimately pay. These will depend on any company acquisitions that you have made, as well as taking recent tax changes into account.
You will need to pay a set amount of your staff wages directly to the federal government. This is called Federal Income Tax Withholding (FITW), is the responsibility of an employer, and can be very confusing if you have never done it before. Partly, this is because every employee will have different criteria regarding just how much income tax they are liable for. Having to withhold differing amounts can get very complex very quickly.
Fortunately, technology has proven to be a fantastic way to make sure that your tax payments are correct. Having the right software that can manage your payroll will make it significantly easier when it comes to paying the taxes of your workforce. However, even with the best software available, you will still need to make sure that you have up to date details of each employee on your team.
Even knowing their marital status is important, as married couples pay different tax rates from single people. Itâ€™s also worth noting that some employees may be tax-exempt. This is quite rare, but it does happen. Usually, it is the result of overpaid taxes in previous years, but no matter the reason, their tax-exempt status will need to be declared via their W-4.
When you are withholding money from your employees in order to pay their income tax, you will need to deposit that money on a regular basis. It is illegal to keep that money, and you should never use that money for any other reason. It is never to be considered as a cash advance. Doing so will leave you exposed to a range of penalties. You are allowed to make your payments on a monthly or semi-weekly basis through the Electronic Federal Tax Payment System. If you miss these payments, then you will face some form of penalty.
While many people are hesitant to tackle their taxes, they are easier than ever to complete and file no matter what type of business you run. Even for new businesses, it is relatively simple. While the process has a reputation for complexity, it is actually a much more streamlined process that you might think. There are the three key steps to take when it comes to preparing your taxes. They are:
If you have gone the traditional route of filling out your tax forms using pen and paper, then youâ€™re going to need to post your forms off. However, if you have used more tech-based methods, then you have other options. E-filing is now possible and often results in a much faster processing time as well. This can speed up the time it takes for you to receive any expected (or unexpected) tax refunds. If you make any mistakes in your tax filings, this can be easily rectified if you are aware of it. Simply use Form 941-X for basic filing purposes, or use Form 944-X if you usually make use of Form 944.
Tax time can become very frustrating, so it pays to make sure that you know what is expected of you. The more that you understand the process of compiling and filing your taxes, the easier the process will become. Although nobody enjoys handing over their hard-earned money, the repercussions of trying to avoid paying your federal income tax can be catastrophic.