Researching Taxation And Business Regulations.
Now that I’m on my way to running the business instead of just figuring out how to start it, I have been looking into the big issue of taxation and regulations I need to follow.
What I have learned so far:
1. Workers Compensation Insurance is necessary even though my business is a sole-prorpretor company. I’m not sure if this insurance will be of use to me as the owner/employee of my own company or not, but the laws say that it is a requirement for everyone… (Edit: This was false in my case, I was able to cancel my workers compensation insurance as it was not necessary, I think I even received a prorated amount back from the Insurance company).
2. State and Federal Unemployment Tax, also known as FUTA tax, is another requirement. The funny thing is, that I would never have any benefit from this tax. I can in no way ever make a claim on my own business! It seems like an unnecessary double standard seeing as I will be the only “employee” of the company. Supposedly, the tax goes down to a fraction of a percent after a few years. I haven’t yet figured out exactly how much I will have to pay for this. (Edit: This is false, I was able to receive unemployment benefits.)
3. Self Employment Tax.
This will be an extra ~16% of my taxable personal salary income. Seeing as I will be electing to be taxed as an s-corporation, that means, if I say that 50% of my pay is considered a salary to myself, I will have to pay the standard income taxes (federal, state) as well as the ~16% self employment tax on that money.
4. Standard state and federal income tax.
These are the taxes that everyone pays. Of course, the state and federal government both want a cut. According to what I have researched so far, Illinois is at 3%, and the federal government has a graduated rate based on the amount of income you take in. (Edit: I learned later that the state rate is variable and the federal rate is set at a certain amount per person as long as you as a business are paying into your state’s fund).
5. Quarterly payments and forms for self-employment, standard income tax, unemployment…
The government wants money as soon as it can get it to, which I assume make interest on tax it rakes in. So they require self-employed people who will make a profit of $1000 or more to make quarterly, monthly, or weekly payments of tax money to them.
It looks like I will be able to pay most of these things online through their EFTPS system.
Another bit of luck looks like Illinois is part of a pilot program, so that I will be able to pay both state and federal payments through the system. Not sure which types of payments I can do through that yet. (Edit: This pilot program vanished for whatever reason, but I did find a state system online I could submit payments to instead called Illinois TaxNet).
6. Yearly taxes for the s-corporation and myself.
S-corporation election means that I will have to file an IRS Form 1120S (With Schedule K-1) each year. That also means I will have to do W-2 reporting for myself as my own employer. It also looks like other things like an SS-4 and W-3 will need to be done. An IRS Form 940 for annual federal unemployment FUTA tax.
As for personal, I will have to file a IRS form 1040.
I think I will be looking into getting H&R block’s TaxCut software. It looks to have a better price/performance ratio than the other software out there. I will have to do more research though. TurboTax is said to be the best, but to use it for my situation, it looks like I would have to buy 2 pieces of software and pay to have state returns sent (Edit: it’s actually more like 3 or 4 pieces). According to reviews I have read so far, the two programs produce compairable results, even though TurboTax is said to be better.
Well that’s all I see for now.