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Many entrepreneurs think about taxes all year long. Most consider each quarter’s deadlines. There are due dates to meet for quarterly estimated tax payments, filing annual tax returns for S Corporations, and corporate tax returns for corporations. Small business owners often place so much focus on filing and payment deadlines that they may not realize they can take advantage of certain tax opportunities right now.
One area where small business owners may find major tax savings is on FICA taxes. Let’s explore more about this employment tax and its benefits for business owners.
General Business Taxes
Small businesses that form a limited liability company (LLC) or incorporate as a corporation must have an understanding of the local, state, and federal tax system. Understanding these types of taxes and systems allow business owners to determine how they will fulfill their tax obligations as they pertain to their business entity.
In order to understand FICA tax, it’s important to know about the five general business taxes. These include the following:
1. Income tax
Every business must file an annual income tax return, unless it is incorporated as a partnership. Income tax forms vary depending on your business structure.
2. Estimated tax
If you are a sole proprietor or self-employed and owe $1,000 or more in taxes, you’ll need to pay estimated taxes. These payments are typically made in quarterly installments each calendar year.
3. Self-employment tax
Self-employed workers pay this tax, which acts as a social security and Medicare tax.
4. Excise tax
Businesses that manufacture or sell certain products, such as tobacco, alcohol, or fuel, will need to file excise taxes.
5. Payroll tax
FICA tax is part of payroll tax. (We’ll explain more about its acronym in a moment.) Additional employment taxes include federal income and federal unemployment (FUTA) tax.
What is FICA Tax?
FICA stands for Federal Insurance Contributions Act. According to the IRS, FICA is composed of the old-age, survivors, and disability insurance taxes. This includes social security and Medicare taxes.
Both the employee and the employer pay FICA tax. The cost between employer and employee is split 50/50 in order to fund social security and Medicare.
FICA’s current tax rate is 6.2% for the employee and the employer, at 12.4% total. This is for social security. Medicare is 1.45% for the employee and the employer, totaling at 2.9%. Please note that this tax rate changes each year. It’s wise to keep up to date with the IRS or consult a tax professional if you are unsure of the current tax rate.
How to Report FICA Taxes
Employers withhold FICA tax from the wages of employees. The amount deducted from employee pay is sent to the IRS. As the employer withholds FICA taxes from employee’s wages, they must also make sure to pay their correct tax portion as well.
FICA taxes are reported using Form 941 Employer’s Quarterly Federal Tax Return. This form is due on a quarterly basis, similar to that of the quarterly estimated tax payment schedule. Small businesses pay FICA taxes using the IRS’s Electronic Federal Tax Payment System (EFTPS).
How Business Owners Can Save on FICA
Now that you have an understanding of general business taxes and how to report and pay FICA taxes, you may wonder how small business owners may receive FICA savings.
If you have incorporated as an LLC or corporation, the next step is electing to change your business structure to an S Corporation. This allows the business owner to put themselves on payroll and save money on FICA taxes.
However, the process isn’t as easy as simply swapping out entity formations. In order to elect an S Corporation, you’ll need to meet certain eligibility requirements. Let’s use the example that you have incorporated as a corporation. This corporation must be a domestic corporation. It may not have more than 100 shareholders. The corporation must have one class of stock and allowable shareholders, which may include individuals and certain trusts and estates. If you meet the eligibility requirements, you may proceed forward in electing an S Corp for your business.
Tax season looks a bit different in 2021. Tax Day, which typically falls on April 15 of the calendar year, has received an extension. The new deadline is now May 17, 2021.
While we cannot provide legal advice, we do advise business owners to consult with a CPA, accountant, or legal professional. You may ask additional questions about FICA tax savings, S Corporations, or any other tax items you wish to address.
Deborah Sweeney is the CEO of MyCorporation.com. MyCorporation is a leader in online legal filing services for entrepreneurs and businesses, providing start-up bundles that include corporation and LLC formation, registered agent, DBA, and trademark & copyright filing services. MyCorporation does all the work, making the business formation and maintenance quick and painless, so business owners can focus on what they do best. Follow her on Twitter @deborahsweeney and @mycorporation.
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