Business Taxes - Entrepreneur's Toolkit

Introduction

Income Taxes on the Business

Sales and Use Taxes

Employee-Related Taxes

Ad Valorem and other Taxes

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Introduction

Some of the most complex issues facing small business owners today are the various taxes and tax structures. Your business may be subject to, or responsible for, collecting or withholding:

• Income Taxes on the business itself
• Sales and Use taxes
• Employee-related taxes
• Ad Valorem and other taxes (taxes on property)

The IRS has a wealth of information at IRS.gov.

The Alabama Department of Revenue has a publication titled Starting a Small Business that details all state tax guidelines for small businesses. It is available on-line at their previously listed
website.

Your state tax ID and federal tax ID numbers work like a personal social security number, but for your business. They let your small business pay state and federal taxes.

Your Employer Identification Number (EIN) is your federal tax ID. You need it to pay federal taxes, hire employees, open a bank account, and apply for business licenses and permits.

It's free to apply for an EIN, and you should do it right after you register your business.

Your business needs a federal tax ID number if it does any of the following:

• Pays employees
• Operates as a corporation of partnership
• Files tax returns for employment, excise, or alcohol, tobacco, and firearms
• Withholds taxes on income, other than wages, paid to a non-resident alien
• Uses a Keogh Plan (a tax-deferred pension plan)
• Works with certain types of organizations

Apply for an EIN with the IRS assistance tool at IRS.gov. It will guide you through questions and ask for your name, social security number, address, and your "Doing Business As" (DBA) name. Your nine-digit federal tax ID becomes available immediately upon verification.

The need for a state tax ID number ties directly to whether your business must pay state taxes. Sometimes, you can use state tax ID numbers for other functions, like protection against identity theft
for sole proprietors.

The process to get a state tax ID number is similar to getting a federal tax ID number, but you will have to do it with the Alabama Department of Revenue. Contact them at the location listed previously.

The following information is related to the four basic small business tax groups.

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Income Taxes on the Business

Every business is taxed on its income. Businesses typically submit estimated tax payments. Estimated tax payments may be paid in full or in equal installments on or before April 15, June 15, September 15, and January 15. It is highly recommended that you get a separate bank account in which to immediately deposit your estimated taxes.

Federal Taxes

Income from proprietorships, partnerships or other unincorporated businesses is subject to individual income taxes of the owners using form 1040 with appropriate schedules. Incorporated businesses are subject to U.S. corporate income tax laws. For further information contact:

Internal Revenue Service
(800) 829-1040
www.irs.gov

State Taxes

Like the federal income tax, the state also requires that income from proprietorships, partnerships or other unincorporated businesses be taxed at the state individual income tax rate of the owners. In Alabama, both foreign and domestic corporations are subject to a net Income Tax and Business Privilege Tax. Several useful publications, Taxpayer Service Center locations and phone numbers are available at www.ador.state.al.us.

For information on city and county taxes, contact the appropriate city and county offices in your area.

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Sales & Use Taxes

Any person desiring to conduct a retail business in Alabama must submit an “Application For Sales Tax License” to the Department of Revenue. Sales tax is imposed on the retail sales of all tangible personal property sold in Alabama by businesses located in Alabama who have inventory for sale in the state. The tax is remitted by the 20th of each month for the previous month’s sales.

Local taxing authorities may also impose a sales tax; these rates vary.

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Employee-Related Taxes

Employment related taxes generally fit into three categories:

1. Taxes you must pay for each employee
2. Taxes you must withhold from each employee's pay
3. Workers' compensation

Workers’ compensation is not actually a tax but an expense related to employment. Workers’ compensation rates vary depending on industry, occupation and risk factors involved.

For more information concerning employment taxes contact the appropriate state or federal agency.

Federal Payroll Taxes

For federal income tax withholding information contact:

Internal Revenue Service Tax Information
1-800-829-1040

An invaluable resource in insuring timely compliance in Federal Tax Administration is IRS Publication 15, Circular E-Employers Tax guide. It is a 68-page document covering all aspects of tax management. Go to www.irs.gov/pub/irs-pdf/p15.pdf IRS Publication 505, Tax withholding and Estimated Tax is at: www.irs.gov/pub/irs-pdf/p505.pdf. To order forms contact:

Internal Revenue Service
Forms Distribution Center
1-800-829-1040

State Payroll Taxes

For State of Alabama tax withholding information, contact:

Alabama Department of Revenue
Business Registration Unit
(334) 242-8830
www.revenue.alabama.gov/withholding

Social Security Tax

The contribution rate, also known as FICA, is 7.65%for employees and 15.30% for self-employed. The rates are broken out as follows: 6.2% (Social Security portion) on earnings up to the maximum taxable amount; 1.45% (Medicare portion) on all earnings. Set by law, these rates haven't changed since 1990. The Social Security Administration has a web page especially for employers at: www.ssa.gov/employer.

For social security tax (FICA) information contact:

Employer Reporting Service Center
(800) 772-6270
Monday - Friday, 7 am to 7 pm, EST
employerinfo@ssa.gov

Workers’ Compensation

For workers’ compensation information, contact:

Alabama Department of Industrial Relations
Workmen’s Compensation Division
(334) 242-2868
www.dir.state.al.us

Unemployment Compensation Tax

For Unemployment Compensation Tax information, contact:

Alabama Department of Revenue
(334) 242-8830

For further information on Alabama Unemployment and Workers’ Compensation, see the Alabama Development Office publications, A Guide to Simplifying Alabama’s Employment Related Laws and Alabama Unemployment and Workers’ Compensation Manual. You may request copies by contacting:

Research Division
Alabama Development Office
Center for Commerce Building, Suite 600
401 Adams Avenue
Montgomery, AL 36130
(334) 242-0400

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Miscellaneous Taxes

Ad Valorem Tax

Ad Valorem Tax is a property tax levied on the owners of real and personal property within Alabama. All property must be assessed each year, between October 1 and December 31, with the county tax assessor. This property will be assessed in one of the following four classes and assessment rations:

• Class I. All Property of Utilities
• Class II. All Property not Otherwise Classified
• Class III. All Agricultural, Residential, Forest Property & Historical Building Sites
• Class IV. All Private Passenger Automobiles/Motor Trucks Used for Personal Use

The tax rate is 6.5 mills per dollar of assessed value for the state; local rates vary. Title 40, Code of Alabama, 1975 Chapter 7, requires all business personal property to be reported to the local taxing official in each county annually.

Business personal property is all furniture, fixtures, and equipment used in the operation of all businesses, corporations, and partnerships.

For more information on ad valorem tax contact:

Alabama Department of Revenue
Property Tax Division
(334) 242-1525
www.ador.state.al.us/advalorem/index.html

Motor Vehicle Division

The following taxes are administered by the Alabama Motor Vehicle Division:

Motor Vehicle Registration Fees

An annual registration fee or tax on each motor vehicle operated upon the public state highways of Alabama. The standard rate of tax is $23.00. The State of Alabama also has a Certificate of Title fee of $18.00 due with the application for title to record the ownership of the vehicle. Tags may be purchased and fees paid in the taxpayer's county of residence.

International Registration Plate Fees

The motor vehicle division in Montgomery issues international registration license plates to owners of commercial and private truck/truck tractor and trailer combinations with a gross vehicle weight of 26,000 pounds or more that travel in interstate commerce (two or more states). These fees are due annually with varying rates depending on the heaviest weight to be hauled and the states in which the vehicle is to be traveling. Alabama currently collects fees for approximately 46 states. License fees are different for each state.

For more information:

Alabama Motor Vehicle Division
P.O. Box 327630
Montgomery, AL 36132-7630
(334) 242-9000
www.ador.state.al.us/motorvehicle/index.html

Seller's Use Tax

This tax is imposed on the retail sales of all tangible personal property sold in Alabama by businesses located outside Alabama that have no inventory for sale in Alabama but only a sales office or agents soliciting retail sales in Alabama. This tax is due on a monthly basis and is to be remitted by the 20th of the month following the close of a month.

Consumer’s Use Tax

This tax is imposed on tangible personal property brought into Alabama for its storage, use or consumption in the state when the supplier did not collect seller’s use tax on the sale of the property. This tax is due on a monthly basis and is to be remitted by the 20th of the month following the close of a month. The rates are the same as shown above.

Lodgings Tax

This is a privilege tax upon every person or firm that rents or furnishes lodgings or accommodations to transients for a fee. The tax is remitted on the 20th of each month following the month the tax accrues.

In addition to the state rate, there may be city and/or county lodging taxes due; these rates vary.

Rental or Leasing Tax

This is a privilege tax levied on the lessor for the leasing or renting of tangible personal property. Leasing tax is due on “true” leases. “True” leases are those in which the title to the property is retained by the lessor at the end of the lease agreement. “Conditional sale” leases, leases in which the title to the property is transferred to the lessee at the end of the lease agreement, are subject to sales tax. This tax, in both cases, should be remitted by the 20th of each month following the month that the tax accrues.

Privilege/Business License Tax

A privilege license is a license requirement of every person, firm, company or corporation engaged in any business, vocation, occupation or profession described in Title 40-12 Code of Alabama 1975. The annual license covers the period of October 1 through September 30. The license will be delinquent on November 1. Please refer back to Chapter 2 Licenses and Permits for more detailed information.

Store Licenses

Any person, firm, corporation, association or co-partnership, either foreign or domestic, is required to obtain a license to operate, maintain, open or establish any store in this state in which goods, wares, or merchandise of any kind are sold, at either retail or wholesale. A check with city and county officials will determine what local licenses and permits are necessary.

You can learn more about these and other industry-specific taxes at the Alabama Department of Revenue (site previously mentioned).

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