Filing taxes is one of the more cumbersome tasks associated with running a business. While not likely to be at the top of the list of any business owner’s favorite tasks, it is a necessary one to do.
U.S. tax codes are not the easiest to understand, yet business owners need to be careful not to make mistakes. Ignorance or confusion about tax laws is not an excuse accepted by the IRS and state/local tax collection agencies. It’s important to file correctly in accordance with tax laws or else face potentially costly penalties, even if your mistake was accidental. As a first step, you’ll need a Employer Identification Number (EIN). to file your business taxes.
In this post, we’ll take a look at the definition of IRS tax codes and offer tips to help business owners understand how tax codes are used. We’ll also do a deeper dive into specific tax codes to help you have an easier time when filing your company’s tax return.
What are IRS Tax Codes?
As Congress passes tax laws, it is up to the U.S. Internal Revenue Service (IRS) to execute and enforce them. To facilitate this, the federal agency compiles these tax laws into a lengthy and comprehensive document containing all current tax codes.
The phrase “tax codes” can be interpreted in two different ways: 1) a set of laws referred to as “The Internal Revenue Code” (also known as “IRC”) or 2) a specific law contained within the IRC.
Tax codes also dictate the amount of tax money due, along with outlining any deductions and/or credits both individuals and businesses can enter on their tax returns to reduce their tax liability.
What does the U.S. Treasury have to do with the federal tax code?
Federal tax codes need to be interpreted, and this task is given to the U.S. Treasury Department. What the federal agency does is “officially” interpret the IRS code and give directions to U.S. taxpayers on how to comply with IRC requirements. To further aid taxpayers, the Treasury Department gives explanations of specific tax codes and provides examples of how these laws are used.
Taxpayers can access and search through the Internal Revenue Service’s website (the official .gov website) for information or search through the Title 26 section of the Code of U.S. Regulations website, a resource maintained by the National Archives.
To find what you are looking for, take these steps:
● Search “Title 26 Internal Revenue” and view the table of contents to see current Treasury regulations
● Use “Go” to access specific sections of Title 26 to find up-to-date rules for any specific Treasury regulations
● Enter keywords into “Search” to find what you need (e.g., you can search “deferred taxes”)
Local libraries typically also keep IRS pamphlets on hand to give people access to information about specific tax laws.
Tax code compliance is the law
A business owner must comply with all tax rules. Anyone who does not adhere to IRS, state, or local tax laws will be penalized. By keeping up with IRS rules, which are subject to frequent change, you improve your chances of complying with tax laws and, as a result, avoiding costly fines and penalties. Additionally, staying compliant with IRC requirements lowers the chances of being tagged for an IRS audit.
Interpreting IRS Tax Code
Many people ask themselves, “What are tax codes?” Taxes aren’t the easiest thing to manage, and they can be overwhelming and confusing. While all business owners are mandated to comply with the IRC, the good news is you do not actually have to read tax codes to abide by them. However, since the process has many complexities, it’s wise to know basic information so you can find what you need when you need it.
Explore IRS publications
The IRS puts out numerous publications to provide guidance for taxpayers. These resources are also designed to help people interpret tax codes. The helpful publications that small business owners should know about include:
Your Rights as a Taxpayer (Publication 1)
This is the most basic IRS publication everyone should explore first. Included in Publication 1 is “The Taxpayer Bill of Rights,” which explains your rights and breaks down the processes for examination, appeal, collection, and refunds.
Tax Guide for Small Business (Publication 334)
Publication 334 provides a general overview of federal tax laws for self-employed persons, giving details about income, expenses, and tax credits as they apply to businesses.
Starting a Business and Keeping Records (Publication 583)
This publication reiterates the fact that business owners are responsible for understanding their tax responsibilities when launching a business, along with how to continuously maintain good records while the business is in operation. This pamphlet also provides valuable information about EINs, business structures, and other helpful tips.
Federal Income Tax Withholding Methods (Publication 15-T)
Businesses hiring employees should be familiar with Publication 15-T. This publication outlines how owners can accurately calculate federal income tax withholding from their employees’ paychecks.
Understanding Your EIN (Publication 1635)
Obtaining an Employer Identification Number (EIN) is an important step for opening a business. Publication 1635 explains the definition of an EIN, who is eligible to obtain an EIN, situations where an EIN is required, and other important details about EINs.
Small Business Health Care Tax Credit (Publication 4862)
Publication 4862 outlines eligibility guidelines for this tax credit and gives business owners guidance about applying this credit to their tax returns.
Independent Contractor or Employee (Publication 1779)
Business owners who work 100% for themselves through selling services or products usually know they fall into the self-employed category. Other types of small business owners working in different capacities, e.g., freelancers, gig workers, or consultants, may be unsure if they are self-employed, especially if they have to answer to someone else. Those in this “gray” area will find Publication 1779 helpful in determining if they are classified as an employee or independent contractor.
How To Depreciate Property (Publication 946)
Depreciation is a helpful way to defer tax obligations. In Publication 946, the IRS explains to business owners how they can recover costs associated with a business or its income-producing properties. To depreciate property you own, the following rules apply to property:
● You must own the property
● Must be used during the course of business or income-producing activity
● Must have a useful life● You expect to use it for more than one year
Retirement Plans for Small Business (Publication 560 – 2023)
Small business owners who are not working for larger companies that provide pensions or have employers contributing to their retirement plans, such as 401(k)s, must do their own planning. Publication 560 outlines the different options small business owners have, including:
● Simplified employee pension (SEP)
● Savings incentive match plan for employees (SIMPLE)● Qualified plans for self-employed
individuals (also referred to as Keogh plans or H.R. 10 plans)
Use tax software
While the IRS will still accept paper tax returns, using software is much more efficient because business owners can access software versions designed specifically for businesses. This helps them identify deductions, credits, and other important tax rules businesses are required to follow.
Work with a tax professional
It’s common for small business owners to find it incredibly time-consuming to organize and complete taxes, even if they use tax software. Alternatively, many find it beneficial to work with a professional tax specialist. Tax experts are current on ever-changing tax laws and can help determine which ones apply to your company.
Obtain Your Employer Identification Number (EIN)
Many small business owners are required by law to obtain their employer identification number before they open for business, but not all. Even if not required, business owners should explore getting one.
Advantages of obtaining an EIN
● Current or future ability to hire employees without delays
● Get access to favorable business loan opportunities
● Avoid the need to include a Social Security number on business documents
● Easier to file business tax returns
● Ability to open business bank accounts
● Gain a more professional look since EINs replace Social Security numbers
Steps to applying for an EIN
● Assemble all required documentation, including your legal business name, “doing business as” (DBA) designation, business phone number and address, and the date the business opened
● Include the name of the person responsible for the business, along with their SSN or ITIN (this is most likely going to be yourself)
● List your company’s entity type (“business structure”) and tax structure
● Share the number of employees you currently employ or provide an estimate of how many you plan to hire
● Select the reason why you’re applying for an EIN
● Answer any tax-related questions presented to you in the application
● Review your application to ensure all questions are answered correctly and in full● Submit your application and wait to receive your EIN
Conclusion
While you don’t need to memorize the IRS tax codes for business, it’s a good idea to become familiar with common rules that apply to businesses and to learn how to find guidance when you need it. Places to find help include:
● Government publications
● Searching the official IRS, Treasury, and National Archives websites
● Reaching out to a tax professional
Knowing where to find help makes it easier to interpret tax laws when you need answers.
Taxes aren’t the most fun part of running a company, but they are a reality. Learning how to access the tax information you need can help set you up for success.