As you start your new practice, paying taxes may not be convenient, but it is something you will be required to do! No matter what legal structure of a business your practice takes, you'll probably have several tax-related issues to deal with – payroll, income, property and sales taxes.
The proper payment of taxes and compliance with applicable tax laws is essential to the long-term health of your practice. As with so many areas in business, this is an area where outside advice and counsel is a must. An accountant, CPA or tax attorney will be able to help you navigate the world of taxes and likely save you more money than what they charge you in fees. Additionally, compliance provides a wonderful peace of mind. This external help will allow you to focus on your patients and not spend more time than necessary on tax issues.
What do I need from the IRS?
A tax ID number must be obtained from the IRS if you are not going to operate as a sole proprietor. As a sole proprietor, taxes can be reported and paid under the individual's Social Security number. As an alternative, a proprietor can apply for a business taxpayer ID number from the IRS, called an Employer Identification Number (EIN). For all business forms other than a proprietorship, an EIN must be used.
Federal Employer Identification Number (EIN)
- Used on bank accounts, insurance forms, taxes and payments to IRS for payroll taxes
- Application available from the Internal Revenue Service
- No filing fee
- See the IRS website for more information on obtaining an EIN
No matter what type of business form is finally selected for the practice, payroll taxes will have to be paid. In the case of a sole proprietorship or independent contractor, the practitioner is responsible for payment and withholding all of their taxes, including self-employment taxes.
What about withholding?
If the business form is a partnership or corporation or has employees, taxes must be withheld for all employees and submitted to both the state and federal governments on a regular basis. An EIN number is required as are special forms.
For tax withholding in partnerships, corporations, or proprietors that have employees, the government considers the employer to be operating as an agent and in trust for the government. Failure to collect taxes or conversion of the tax monies to one's own personal use carries very severe criminal sanctions. It's important that all tax obligations be paid on time.
For withholding of state taxes, requirements vary from state to state. Check with your state treasurer's office for the proper procedures and forms needed to comply with your state's tax laws.
When reporting and paying taxes under a Social Security number or EIN, through withholding or quarterly installments, at least 90 percent of the annual income tax liability for a given year must be paid to the government by December 31st.
Failure to pay at least 90 percent of the estimated tax bill will result in payment of penalties. Income tax laws for all types of business entities are complex and have different rules for treatment of business income and expenses. Again, professional assistance is a must.
Property taxes are paid in some locales at the state, county, and/or city level. Personal and real property are subject to various tax laws and regulations depending on location and circumstances.
For example, with leased equipment some locales assess a tax, similar to a sales tax, on the lessor on the rental payments and that tax is included in the pricing and terms of the lease agreement and passed on to the lessee. Also, if you own your office premises, you will likely be responsible for real-estate property taxes. Check with your county and state treasurers' offices for information on applicable local taxes.
Generally sales taxes are not assessed on services, but if the practice is going to sell goods, such as nutritional supplements, they may be subject to sales tax. A sales tax license is required from the state and in some locations from counties and cities.
A sales tax number is used for reporting and making payments on taxable items. Requirements vary from state to state and you can check with your state treasurer's office for information.