Tax Tips for Start-Ups: US Sales and Employment Withholding Obligations

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Collecting Sales Tax and Withholding Employment Tax is a Serious Responsibility for a Start-Up Business

Tax ranks high among the many structural issues a start-up needs to consider. Even tax responsibilities that seem traightforward –such as collecting sales tax and setting up withholding for employees – can be challenging and need to be approached carefully.

When you start a business, there are certain taxes that you as a business owner and employer are required to withhold and remit to the appropriate taxing jurisdiction. These reflect your responsibilities to the state and federal government.In essence, the business owner acts as a fiduciary for the government in collecting and remitting tax payments.

Because the government entrusts the business owner with collecting its tax payments, there are strict compliance penalties that will be enforced against you and all responsible persons if the taxes are not remitted. In some instances, these remittance failures can lead to criminal prosecution. These penalties are called "trust fund" penalties or "responsible person assessments." A “responsible person” is any person that has the responsibility or authority to ensure the collection and remittance of the applicable tax. Sales tax and employment tax are the two main types of taxes for which trust fund penalties exist.

Trust fund penalties are assessed against individuals rather than the business. Generally, they amount to 100 percent of the outstanding tax owed to the government. In other words, you are personally liable, as well as your business being liable, for the full taxes owed which can put your personal holdings at risk.

Determining your tax exposure – and thus your fiduciary responsibilities – is a serious and consequential matter. It requires technical knowledge of tax codes and laws. Expertise – inside the company or outside – is essential if you want to be sure you are meeting all your fiduciary obligations.

Table of Contents

1. Collecting Sales Tax and Withholding Employment Tax is a

Serious Responsibility for a Start-Up Business

2. Sales Tax is Tied to a Physical Location – Even If Your

Product Isn’t Physical

3. You Must Withhold Both Federal and State Employment Tax For Your Employees

4. Withheld Employment Taxes Do Not Belong to You – Even Before

You Send It to the Government

5. Caution: Classifying Employees As Independent Contractors to

Reduce or Eliminate Withholding Obligations May Be Disputed

6. State Employment Tax Withholding Depends on Business Activity

within a State - Workers in Remote Locations Can Complicate

your Tax Picture

7. Don’t Forego a Detailed Analysis of Your Obligations

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Jeanne Goulet, Marks Paneth & Shron LLP Certified Public Accountants & Consultants | Attorney Advertising

Written by:

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Marks Paneth & Shron LLP Certified Public Accountants & Consultants on:

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