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Many Entrepreneurs Don't Understand Business Tax Laws

Written by Ken Gaebler
Published: 6/18/2010

Many small business owners can be caught off-guard by the different tax laws that affect self-employed workers.

While most people have come to some general understanding about the tax laws that affect them individually, Associated Press columnist Joyce Rosenberg says that many entrepreneurs run into problems because they don't know how business tax laws are fundamentally different.

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Rosenberg says the first issue many new entrepreneurs encounter is that they need to estimate their tax payments and pay them quarterly to the IRS, because their taxes aren't automatically withheld, like they would be for an employee. She says most accountants believe small business owners should save 30 to 40 percent of their earnings for tax payments.

Rosenberg says that small business owners are also often caught by self-employment taxes. Employers generally pay half of the social security and medicare taxes for an employee. But when someone is self-employed, they end up paying the full amount themselves - which is bad news for entrepreneurs when tax season comes around. And because business owners won't have a W-2 form to tell them much they have made throughout the year, accurate record-keeping is essential.

The paperwork burden on small businesses could become even bigger in the near future. The recent healthcare legislation includes a requirement that small businesses issue a 1099 form to any company from which it received $600 or more in goods or services during the year.

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