Tax Obligations of Small Businesses

Federal Obligations

As a small business owner (for-profit), whether a sole proprietorship, partnership, LLC or corporation, you must pay self employment tax and file Schedule SE to Form 1040 if you earn profits of $400 or more in a given year from the business. See the Self-Employment Tax page on the IRS website for details.

If your small business (including a nonprofit) has one or more employees, you will generally be required to withhold federal income tax from their wages. You also may be subject to Social Security and Medicare taxes under the Federal Insurance Contributions Act (FICA) and federal unemployment tax under the Federal Unemployment Tax Act (FUTA). If you are required to report employment taxes or give statements to employees, you need an employer identification number. See the Employment Taxes for Businesses page on the IRS website for details.

If your small business hires independent contractors, you need to report contract payments annually on Form 1099-MISC, which goes to the independent contractor and to the IRS. Please see the Independent Contractors vs. Employees page on the IRS website and the Employee Versus Independent Contractor section of this guide for details.

Additional informational returns requirements may apply to your small business. Check out the IRS Guide To Information Returns for more information.

Partnerships and multi-member LLCs that elect to be treated as partnerships generally do not pay federal income tax at the entity level, but must file Form 1065 annually with the IRS. This return shows the business's income, deductions, and other required information, and must include the names and addresses of each partner or member and each partner's or member's distributive share of taxable income.

Nonprofit organizations that obtain 501(c)(3) exempt status generally do not pay federal income tax, but must file an annual tax return with the IRS, unless their gross receipts are normally $25,000 or less. Organizations beyond the $25,000 threshold with gross receipts below $1,000,000 and total assets at the end of the year less than $2,500,000 can file the return on Form 990EZ. Organizations with gross receipts or assets above that must file the return on Form 990. For details, including how to calculate gross receipts, see the Instructions for Form 990 and Form 990-EZ.

State Obligations

States impose additional taxes, withholdings, and informational filing requirements on small businesses. Businesses generally must report any new hires to the state, and take care of workers compensation requirements. See the How to Start a Business section for details on state requirements.

Note: The information contained on this page is meant for general, information purposes only, and CMLP makes no claim as to comprehensiveness or accuracy of the information. Because of the complexity of tax issues associated with starting any business, you are encouraged to consult with a tax attorney and/or accountant to ensure compliance with federal, state, and local tax requirements. The CMLP is not a substitute for individualized legal advice, especially not individualized tax advice.


Subject Area: