Employment Taxes

As long as you have employees, including yourself, you must deal with payroll taxes. These include:

• Social Security and Medicare (FICA) taxes on wages and other taxable compensation. The tax is paid by the employer and the employee. For 2010, the rate paid by the employer for the Social Security portion is 6.2% on wages up to $106,800; the employee pays a like amount. The rate for the Medicare portion for each is 1.45% on all wages (there is no cap).
• Federal unemployment insurance (FUTA). This applies to the first $7,000 of wages.
• State unemployment insurance. The rate you pay usually is fixed by your state according to your claims experience — the greater the unemployment benefits claims made against your company, the higher your rate will be.

Find information about FICA and FUTA in IRS Publication 15, Employer’s Tax Guide. Contact your state labor department for information about state unemployment insurance (find links to your state here.

If you’re self-employed, there’s no FICA because you don’t have any wages. However, you have a comparable tax burden called self-employment tax. This tax effectively covers the employer and employee share of Social Security and Medicare taxes. You pay self-employment tax as part of your income taxes; usually you’ll need to pay quarterly estimated tax payments to cover your income tax and self-employment tax bill.

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To follow up with my previous post Internet Sales Tax Looms for NY…Will It Catch On? I posed a question along the lines of "do you think it should happen/is it a good idea?"

As of June 1, 2008, the legislation will go into effect, requiring internet retailers to collect a sales tax on any orders being shipped to the state’s residents. This legislation was largely enacted to keep online retail Goliaths (namely Amazon.com) in check and attempt to "level the playing field" for brick and mortar stores in the state.

Amazon has now responded by suing the New York State Department of Taxation and Finance claiming "that since it does not have a physical presence in the state that it should not be required to collect taxes on shipments going to New York." In addition Amazon says the New York law is unconstitutional based on a 1992 U.S. Supreme Court ruling that claims states are prohibited from requiring out of state retailers to collect sales tax unless the company has a physical presence in the state. New York defends the law by arguing that the Amazon Associates program, which allows Web site publishers to receive commissions by promoting Amazon items through their sites make Amazon liable to collect taxes on its behalf for those affiliates who live in New York. (this paragraph courtesy WebProNews.com )

So while the question is no longer "do you think it should happen/is it a good idea?" I now pose these questions to you all: How long before other states enact identical or similar legislation and how do you think it will affect online consumerism?

What makes the problem even worse is that there is no actual official sales tax in the United States. So, instead of a nationwide sales tax that would make everyone play to the same rulebook, you might end up charging twice as much tax as a competitor in a different state. The effect of determining a sales tax is left to the business, and this is where it’s so important to get it right.

Location, location, location
Since there is no national sales tax in the US, it can make it pretty unfair for businesses in certain parts of the country. For example, any sales made in Texas to a company with a presence in the state will be liable for sales tax for the Texas transaction. So, in essence, even if all you have in Texas is a small accounts office with one employee, and the actual sale was made through your Chicago sales team’s offices, you’ll still have to pay the sales tax for the resident in Texas.

This is why so many businesses are pushing for some kind of recognized sales tax agreement. Congress is listening – they’re currently looking at the Fair Tax Act, yet that could be some way off. In the meantime, it doesn’t help your business when it comes to trying to determine your sales tax charges. It all really depends whether you’re operating mainly online or offline.

Web Sales versus Retail Sales
With the Internet providing so many of today’s business transactions, sales tax calculations can be a little muddy. However, the general rule is that as long as you don’t have a presence wherever the sale was made from – say an eBay store made a sale to a resident of Florida, but the eBay store owner lives in Dallas – then you won’t have to charge sales tax. For small businesses, this can mean a huge difference.

The reason the waters are so muddy when it comes to online is that many businesses with an online sales presence use third-party merchant accounts. If your customer and your merchant account provider are in the same state, you’ll have to charge sales tax for that area.

Retail sales are a little easier, as it depends on what your state average is for general sales tax. So for example, Alabama’s general tax is around 4%, while Idaho has a 6.4% state sales tax. Depending on what is sold has a big say in the matter as well, with alcohol and prepared food costing more than newspapers or groceries. Alaska has no tax at all, although the local governments usually encourage a 7% charge.

At the end of the day, determining how much sales tax you should charge depends on many variables, and to make sure you don’t over or undercharge, speaking to your local chamber of commerce and tax office can help you make the right decision.