A Primer on Small Business Tax Obligations

Tax time can be stressful for owners of small businesses, because if you make a mistake on your taxes, you could end up owing the Internal Revenue Service a lot of money. Thankfully, the IRS isn’t going to prosecute someone who makes an honest mistake on a tax return, but they will demand the money they’re owed.

Following is a brief overview of requirements that may apply to you and your business. Consult a tax attorney to make sure you’re handling all tax obligations properly.

New Business Rules

When you start a new business, you also have to set up the appropriate tax accounts with the state of Maryland. The type of business you operate determines which specific accounts you’ll need.

Maryland’s Combined Registration Application lets you set up all the tax accounts you might need – employer withholding, unemployment insurance, sales and use tax, and other account types. You may elect to sign up for direct debit, and the state will deduct applicable taxes from your bank account every month. Some business owners prefer direct debit, because it eliminates the need to remember to pay taxes on time. But if you go that route, be absolutely certain you have enough money in the bank to cover tax payments – if funds are insufficient, the state may void your direct deposit arrangement and demand all balances immediately.

Rules for Contractors

Contractors, sub-contractors, and builders must set up accounts for sales and use tax, income tax, motor fuel tax, and unemployment insurance. The materials contractors use for their job may trigger additional tax liabilities, too, depending on whether the job involved personal or real property. Here’s the difference between those property types:

  • A business hires a contractor to install cubicles for an office. Those cubicles are not permanent fixtures, and the business can take the cubicles with them if they move to a new building. That means the cubicles are that company’s personal property, and the contractor does not owe sales taxes on the materials used to build them. The business owner will be assessed annual personal property taxes based on the value of the cubicles.
  • A homeowner hires a contractor to build a wood privacy fence in the back yard. That fence permanently and substantially improves the property – it’s not a temporary structure that can be moved – so it’s considered real property, and the contractor would owe sales taxes for the fence materials purchased. The homeowner will be assessed annual real property taxes based on the value of the real property, including improvements.

Equipment Leasing

Farmers are not required to pay tax on equipment they lease or buy for their job, such as balers, feeders, and milking machines. Even grain elevators, which would seem to meet the definition for real property, are exempt from sales and use tax. Contractors, however, do pay sales and use tax for equipment.

Food Tax

If you own a business in which 10 percent of all sales is food that is consumed off-premises, that means you’re a “substantial grocery,” and the food is not subject to sales and use tax. Food prepared for immediate consumption, such as an ice cream cone or a salad from a salad bar, is subject to sales and use tax.

Employment Taxes

If you have employees, you are required to withhold taxes from their paychecks and to pay employment taxes to the IRS and the state. Businesses should be careful about how they classify employees, because misclassifying a worker as an independent contractor when that worker actually meets the definition of an employee could result in a business owing the IRS and state for back payment of employment tax, along with penalties.

Lusk Law, LLC, specializes in helping small business owners understand their tax obligations and the laws that apply to their business operation. Our experienced attorneys have provided legal counsel and representation to entrepreneurs in Frederick County, Howard County, Baltimore County, Baltimore City, Carroll County, Washington County, and Anne Arundel County, and other counties in Maryland and Virginia. If you have questions about your tax obligations, please call us at 443-535-9715 or fill out our contact form.

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