Small Business

Tax Workshop

IRS

Department of the Treasury

Internal Revenue Service

www.irs.gov

Publication 1066 (Rev. 7-2003)

Catalog Number 46924L

Student Workbook
SMALL BUSINESS TAX WORKSHOP – WORKBOOK 

 

The IRS Mission 

Provide America’s 

taxpayers top quality 

service by helping them 

understand and meet 

their tax responsibilities 

and by applying the tax 

law with integrity and 

fairness to all. 
SMALL BUSINESS TAX WORKSHOP – WORKBOOK INTRODUCTION 

 

Contents

Introduction Small Business Tax Workshop . . . . . . . . . . . . . . i

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .i 

Taxpayer Rights . . . . . . . . . . . . . . . . . . . . . . . . . .i - iv 

Free Tax Services . . . . . . . . . . . . . . . . . . . . . . . vi - viii

Lesson 1 Business Tax Requirements . . . . . . . . . . . . . . 1-1 

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1-1

Employer Identification Number (EIN) . . . . . . . . . . 1-1 

Recordkeeping . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-1 

Income Statement and Balance Sheet . . . . . . . . . .1-4

Types of Business Organizations . . . . . . . . . . . . . .1-7

Business Returns . . . . . . . . . . . . . . . . . . . . . . . . . .1-8

Net Profit or Loss . . . . . . . . . . . . . . . . . . . . . . . . .1-22 

Business Deductions and Credits . . . . . . . . . . . . .1-30 

Tax Publications and Forms . . . . . . . . . . . . . . . . .1-36 

Lesson 2 Employment Taxes . . . . . . . . . . . . . . . . . . . . . . 2-1 

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2-1

Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2-1

Employer Identification Number (EIN) . . . . . . . . . .2-2

Employer/Employees . . . . . . . . . . . . . . . . . . . . . . . 2-6 

Note: Rounding off. On many 

tax returns you may round off 

money items to whole dollars, 

which is a good way to limit 

math and transcription errors. 

However, you may not round 

off on employment tax returns, 

which include Forms 941 and 

940, discussed in Lesson 3 of 

this publication. 

Form W-4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-8 

Form I-9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2-12 

Information Returns . . . . . . . . . . . . . . . . . . . . . . . 2-13 

Income Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 2-16 

Social Security and Medicare Taxes . . . . . . . . . . 2-17 

Federal Unemployment Tax . . . . . . . . . . . . . . . . 2-17 

Successor Employer . . . . . . . . . . . . . . . . . . . . . .. 2-18 

Earned Income Credit (EIC) . . . . . . . . . . . . . . . . 2-18 
SMALL BUSINESS TAX WORKSHOP – WORKBOOK 

 

Forms W-3 and 1096 . . . . . . . . . . . . . . . . . . . . . .2-20 

Correcting Forms W-2 and W-3 . . . . . . . . . . . . . . 2-24 

Filing on Magnetic Media or Electronically . . . . . .2-24

Penalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2-25 

Putting It All Together . . . . . . . . . . . . . . . . . . . . . 2-25 

Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2-26 

Lesson 3 Part I 

Form 941, Employer’s 

 Quarterly Federal Tax Return . . . . . . . . . . . . . 3-1 

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-1 

Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3-2

Due Dates for Filing Form 941 . . . . . . . . . . . . . . . .3-2

Form 941 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-5 

Monthly Summary of Federal Tax Liability . . . . . . .3-8 

Filing By Other Methods . . . . . . . . . . . . . . . . . . . . .3-8

Depositing Requirements . . . . . . . . . . . . . . . . . . . .3-8

Deposit Penalties . . . . . . . . . . . . . . . . . . . . . . . . . 3-14 

Correcting Form 941 . . . . . . . . . . . . . . . . . . . . . . .3-14 

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3-14 

Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-15 

Lesson 3 Part II 

Form 940, Employer’s Annual Federal

Unemployment (FUTA) Tax Return . . . . . . . . 3-22 

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-22 

Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3-22 

Who Are Employers? . . . . . . . . . . . . . . . . . . . . . .3-23 

Who Are Employees? . . . . . . . . . . . . . . . . . . . . . .3-23 

What Are FUTA Wages? . . . . . . . . . . . . . . . . . . . 3-23

Wages Not Paid In Money . . . . . . . . . . . . . . . . . . 3-24 

Employee Taxes Paid by Employer . . . . . . . . . . .3-24 

Figuring FUTA Tax . . . . . . . . . . . . . . . . . . . . . . . .3-24 

Credit for Contributions to States . . . . . . . . . . . . .3-24 
SMALL BUSINESS TAX WORKSHOP – WORKBOOK INTRODUCTION 

 

State Experience Rate . . . . . . . . . . . . . . . . . . . . . 3-25 

Successor Employer . . . . . . . . . . . . . . . . . . . . . . .3-25 

Depositing the Tax . . . . . . . . . . . . . . . . . . . . . . . . 3-25 

Forms 940 and 940-EZ Filing Requirements . . . . 3-30

Form 940-EZ . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-30 

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-33 

Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3-34 

Lesson 4 Business Use of Your Home . . . . . . . . . . . . . . 4-1 

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4-1

Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-1 

Qualifying for a Deduction . . . . . . . . . . . . . . . . . . .4-2

Business Percentage . . . . . . . . . . . . . . . . . . . . . . . 4-5 

Types of Expenses . . . . . . . . . . . . . . . . . . . . . . . . .4-6

Deduction Limit . . . . . . . . . . . . . . . . . . . . . . . . . . .4-12 

Where to Deduct Expenses Related to 

the Business Use of the Home . . . . . . . . . . . . . . .4-15 

Sale or Exchange of Your Home . . . . . . . . . . . . . 4-15 

Recordkeeping . . . . . . . . . . . . . . . . . . . . . . . . . . .4-16 

Lesson 5 Electronic Federal Tax Payment System . . . . . . 5-1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5-1

Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5-1

940 and 941 e-file . . . . . . . . . . . . . . . . . . . . . . . . 5-2 

940 and941 On-Line Filing (OLF) . . . . . . . . . . . . . .5-5

941 TeleFile . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5-7 

Payment Option for 941 Tele-File . . . . . . . . . . . . . .5-9

1065 e-file For Partnerships . . . . . . . . . . . . . . . . .5-10 

Products in Development . . . . . . . . . . . . . . . . . . .5-11 

The Electronic Federal Tax Payment System 
SMALL BUSINESS TAX WORKSHOP – WORKBOOK 

 

(E

 FTPS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5-12 

Answers

Lesson 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-1

Lesson 3, Part 1 . . . . . . . . . . . . . . . . . . . . . . . . . . .A-2

Lesson 3, Part 2 . . . . . . . . . . . . . . . . . . . . . . . . . . .A-6

Lesson 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-8
SMALL BUSINESS TAX WORKSHOP – WORKBOOK INTRODUCTION 

 

Small Business Tax Workshop

Introduction The Small Business Tax Workshop contains general information 

about different types of business organizations, recordkeeping

requirements and business tax returns. If you need more

information, see LESSON 1, pages 1-36 through 1-39, for a list of 

free Internal Revenue Service (IRS) publications. Call the IRS toll 

free at 1-800-TAX-FORM (1-800-829-3676) to order. 

If you have access to a personal computer, you can also download 

and print any of the 600 federal tax forms with instructions, 

approximately 100 tax publications and other tax materials from 

the IRS Web site at www.irs.gov. 

An alternative to downloading files from the Internet is Publication 

1796, FEDERAL TAX PRODUCTS on CD-ROM. This CD 

contains over 2,000 tax materials, including prior year forms. You 

can purchase the CD-ROM via the Internet at

www.irs.gov/cdorders from the National Technical Information 

Service (NTIS) or by calling toll free 1-877-233-6767. Fax orders 

are accepted at 703-605-6900. Mail orders should be sent to: 

NTIS

5285 Port Royal Rd 

Springfield, VA 22161

THE SMALL BUSINESS RESOURCE GUIDE (IRS Publication 3207) 

contains information important to small businesses. Order your 

free copy by calling 1-800-829-3676. 

Another option is to receive forms, instructions and tax

information from your fax machine by calling 703-368-9694 from

the phone on your fax machine and following the prompts. 

There is a new section on the IRS Web site called the Small 

Business and Self Employed Community at www.irs.gov and 

choose ‘Businesses’ from the contents menu and then ‘Small

Bus/Self-Employed’. If you run a small business or are selfemployed, the site is here to help you. It offers industry professionspecific information and provides links to other helpful sites. 

You will be required to pay federal employment taxes if you have

employees. Lessons 2 and 3 explain your responsibilities for 

paying these taxes.

Taxpayer 

Rights

As a taxpayer, you have the right to be treated fairly,

professionally, promptly and courteously by IRS employees. 

i
SMALL BUSINESS TAX WORKSHOP – WORKBOOK INTRODUCTION 

 

IRS Mission 

Provide America’s taxpayers top quality service by

helping them understand and meet their tax

responsibilities and by applying the tax law with 

integrity and fairness to all. 

A discussion of your right to fairness if your return is examined or 

your account is in the collection process is in Publication 1, YOUR 

RIGHTS AS A TAXPAYER. 

You may find it helpful to have a general understanding of some 

activities of the IRS and how they relate to you as a business 

taxpayer. There are five areas of activity within the IRS with which 

you should be acquainted: Customer Account Services, 

Submission Processing, Examination and Appeals, Collection and 

the Taxpayer Advocate Service. 

Customer 

Account 

Services 

Customer Account Services is a liaison between taxpayers and IRS 

Submission Processing centers. Customer Account Services 

representatives can explain notices and answer other inquiries 

about your tax accounts. They can also help you understand and 

apply tax laws to help you determine your specific tax liability. 

Whether you electronically file or mail your business and personal 

tax returns, they go to a regional submission-processing center for 

processing. IRS processes them with an automated data processing

(ADP) system. The ADP system keeps a record of all business and 

individual tax return transactions. Computer-generated bills for

taxes due and notices explaining changes to accounts are sent

Service Centers

to taxpayers by the submission processing centers, and submission 

processing centers arrange for taxpayers’ refund checks to be sent 

to them.

The IRS is required by law to determine and collect from each

taxpayer only the correct amount of tax due. One way the IRS 

meets this obligation is by examining returns. A notice of

examination does not necessarily mean that the IRS has found, or 

will find, something wrong with your return. 

Examination

and Appeals 

Tax returns are selected for examination for various reasons. 

Returns are computer-scored according to their probability of

ii
SMALL BUSINESS TAX WORKSHOP – WORKBOOK INTRODUCTION 

 

error. The selection may mean you did not give enough 

information about some item of income or deduction. You may

have included nontaxable income or deducted an unallowable 

expense. You may have filed a claim for refund, and the return is 

examined to make sure the correct amount of tax is refunded. 

Your tax return may be examined in your place of business, at an 

IRS office or at your tax representative’s office. When the 

examination is completed, any adjustment will be explained to 

you. If you agree with any proposal to increase or decrease your 

tax liability, you will be asked to sign an agreement form. If you 

do not agree with any changes that are proposed by the examiner, 

you have certain appeal rights, both within the IRS and in the 

courts.

For more information, see Publication 556, EXAMINATION OF

RETURNS, APPEAL RIGHTS AND CLAIMS FOR REFUND. 

Collection Most taxpayers pay their taxes by the date the return is due. For

those who do not pay on time, the collection process begins when a

taxpayer is sent a notice (demand for payment) from the IRS. The 

taxpayer should either pay the amount due or contact the IRS 

immediately. If the taxpayer does contact the IRS, an IRS 

employee will help determine whether the notice is valid, and, if 

so, how to pay any amount owed. 

If a taxpayer who receives a notice does not pay the amount due 

and does not contact the IRS, or if a taxpayer defaults on a 

payment agreement, the IRS may take enforcement actions. 

Examples of enforcement action include the filing of a NOTICE OF

FEDERAL TAX LIEN, the serving of a NOTICE AND DEMAND FOR 

PAYMENT and/or the seizure and sale of the taxpayer’s property and 

rights to property.

To encourage prompt payment of withheld income, social security

and Medicare (employment) taxes, Congress passed a law that 

provides for the trust fund recovery penalty. (These taxes are 

called trust fund taxes because you actually hold the employees’ 

money in trust until you make a federal tax deposit in that amount.) 

For more information, see Publications 594, THE IRS COLLECTION 

PROCESS and Publication 1660, COLLECTION APPEAL RIGHTS. 

Taxpayer 

Advocate 

Service 

The Taxpayer Advocate is the 

spokesperson for taxpayers 

who have been unable to

resolve problems through

normal channels. If you 

have an ongoing tax

problem, call the IRS 

iii
SMALL BUSINESS TAX WORKSHOP – WORKBOOK INTRODUCTION 

 

hotline at 1-877-777-4778 for help. You may also 

write to the Taxpayer Advocate at the office that last contacted 

you. 

If the tax problem is causing or will cause you a significant 

hardship, the Taxpayer Advocate will arrange for an immediate

review of your problem. A significant hardship may occur if you 

cannot maintain your business location, pay the utility bills for 

your business and meet payroll. Significant hardship could also 

occur if your business faces imminent bankruptcy or if the actions 

of IRS would cause irreparable damage to your business. While 

your account is reviewed, any additional enforcement action will 

be suspended if the Taxpayer Advocate determines that a 

significant hardship exists. 

See Publication 1546, THE TAXPAYER ADVOCATE SERVICE OF THE IRS,

for more information. 

Most business taxpayers should be able to meet their tax

responsibilities by using the packages of tax forms and instructions 

they receive from the IRS. Those who need more information may

turn to the IRS’ many free tax publications, education programs, 

audiovisual materials and other services. If additional information 

and assistance are needed, taxpayers can call the IRS or visit their 

local IRS office. By calling or visiting the IRS, taxpayers can get 

answers to questions about their account, general information 

about IRS procedures, services available or the tax law. 

Publication 910, GUIDE TO FREE TAX SERVICES, is available by

calling 1-800-829-3676.

Telephone 

Service

Telephone tax assistance is available in all 50 states, the District of 

Columbia, Puerto Rico and the Virgin Islands by calling 1-800- 

829-1040.

Tele-Tax is an IRS telephone 

TELE-TAX service that provides both 

automated refund information 

and recorded tax information. 

The number is 1-800-829-4477. 

TTY/TDD If you are hearingimpaired and have access

to TTY/TDD equipment,

you can call 1-800-829-4059 

with your tax questions or to 

order forms and publications. 

iv
SMALL BUSINESS TAX WORKSHOP – WORKBOOK INTRODUCTION 

 

See your tax form instruction 

booklet for the hours of operation. 

Assistance is available in most IRS offices (Taxpayer Assistance 

Centers) to help you in preparing your individual federal tax

return. You may also obtain tax forms, publications and help with 

questions about IRS notices or bills. 

Walk-in Service

The IRS has a number of programs designed to help you 

understand your rights and obligations under our nation’s tax

system. Volunteers are an important part of these programs. To 

volunteer to help in one of our taxpayer education programs, or for 

times and locations of available services in your community, call 

the IRS at 1-800-829-1040 and ask for the number of your closest 

taxpayer education office. The taxpayer education programs 

include: 

Taxpayer

Education 

Programs 

• Community Outreach 

• Volunteer Income Tax Assistance (VITA) 

• Tax Counseling for the Elderly

• Small Business Tax Education 

• Bank, Post Office and Library Program 

• Student Tax Clinics 

• Understanding Taxes Program for Students 

• Practitioner Education 

This publication can help you prepare your individual tax return. It

takes you through the individual tax return and explains the tax

laws that cover salaries and wages, interest and dividends, rental 

income, gains and losses, adjustments to income (such as

reimbursed employee business expenses and IRA contributions) 

and itemized deductions. 

Publication 17,

YOUR FEDERAL 

INCOME TAX 

If you have employment taxes to report, you can file your Form 

941, EMPLOYER’S QUARTERLY FEDERAL TAX RETURN, electronically

— by telephone or through a third party such as a payroll service 

company. On-line filing of Form 941— through a personal 

computer —is also available. Visit the IRS Web site (The Digital 

Daily) at www.irs.gov for more information. In addition, you can 

eliminate paper deposit coupons, trips to the bank and postage

costs, by taking advantage of the Electronic Federal Tax Payment 

System (EFTPS). This system, with millions of users, allows you 

to initiate your Federal Tax Deposits (FTDs) electronically by

v
SMALL BUSINESS TAX WORKSHOP – WORKBOOK INTRODUCTION 

 

telephone or personal computer, or you can have your financial 

institution initiate payments. Although this system is mandatory

only for businesses that make in excess of $200,000 in FTDs 

yearly, it is highly recommended and used by other smaller 

depositors because of its simplicity and convenience. To learn 

more about EFTPS or to request an enrollment form, see the 

website www.eftps.gov or call EFTPS Customer Service at 1-800-

555-4477, 1-800-555-8778 or 1-800-945-8400. See Lesson 5 for a 

more detailed discussion of the IRS’ e-file Programs.

The following organizations offer services to people with small 

businesses: Other Sources of

Information 

• U.S. Government Printing Office – For a list of Federal 

 publications that are for sale to assist small businesses, go to 

www.gpo.gov select the ‘Government Bookstore’ 

 then ‘Federal Tax Products’, or call 202-512-1800 (M-F, 

 7:30 to 5 p.m. EST). Fax orders to 202-512-2250 or 

 write to: 

Superintendent of Documents 

U.S. Government Printing Office 

P.O. Box 371954 

Pittsburgh, PA 15250-7954 

• U.S. Small Business Administration (SBA) – offers many

 publications on topics of interest to people with small 

 businesses. A nationwide telephone service is provided 

 through the SBA Office of Advocacy. The U.S. Small 

 Business Administration Answer Desk assists callers with 

 their small business problems. It also serves as a referral 

 service to direct callers to the appropriate government 

 agency, trade association and other information services. 

 The toll-free number, available Monday through Friday 

 from 9:00 A.M. to 5:00 P.M. EST, is 1-800-827-5722. 

• Small Business Development Centers, Business 

 Information Centers, and Women’s business Centers (more 

 than 1,000) – are available in most states and U.S. territories. 

 Business workshops and counseling are available as well as 

 research information for small businesses. Contact the SBA 

 for local phone numbers and check the Internet at 

 www.sba.gov/sbdc for more information. 

• Service Corps of Retired Executives (SCORE) and 

vi
SMALL BUSINESS TAX WORKSHOP – WORKBOOK INTRODUCTION 

 

 Active Corps of Executives (ACE) – provide counseling 

 for business people and conduct SBA-sponsored pre- 

 business workshops. See www.score.org. 

• Social Security Administration (SSA) – The SSA 

 provides information on proper reporting of social 

 security wages for both paper and magnetic media filers. 

 The SSA holds joint seminars with the IRS on proper 

 wage reporting by employers. See www.ssa.gov or call 

 1-800-772-1213/TTY at 1-800-325-0778. 

• SSA and IRS issue a quarterly tax help newsletter 

 (SSA/IRS REPORTER) which is designed to keep 

 employers up to date on changes to their tax and 

 employee wage obligations. View it on-line at 

http://www.irs.gov.

• National Business, Professional or Trade Organizations – 

 provide information for specific businesses and trades. 

Some examples of these are:

 • National Federation of Independent Businesses (see 

 http://www.nfib.com/) 

 • National Association of the Self-Employed (see 

http://www.nase.org/) 

 • National Association of Independent Contractors 

 • U. S. Chamber of Commerce and local Chambers of 

 Commerce (see www.chambersofcommerce.org) 

 National Association of Enrolled Agents (see 

 www.naea.org ) 

 

 National Society of Certified Public Accountants (see 

 www.aicpa.org) 

• Other Federal Agencies provide a variety of services and 

information for businesspersons: 

 • U.S. Department of Agriculture – The Cooperative 

 Extension Service County Agents help rural residents 

 manage small family businesses and farms through 

 workshops, counseling and other types of assistance. 

See www.usda.gov. 

 • U.S. Department of Labor – The Employment 

 Standards Administration provides assistance 

vii
SMALL BUSINESS TAX WORKSHOP – WORKBOOK INTRODUCTION 

 

 regarding labor and wage relations and other labor 

management standards. See www.dol.gov. 

 • U.S. Department of Commerce – The Minority 

 Business Development Agency supports the 

 development of minority owned and managed 

 businesses. Commerce also has an International 

 Business Export Office that provides information on 

imports and exports. See www.doc.gov. 

• State and Local Agencies – provide information about 

 local laws and regulations affecting business people. 

 Since agency and organization names vary in many 

 states, you may want to call your local or state Chamber 

 of Commerce for help in identifying the organization you 

 want: 

 • State Departments of Revenue, Employment, Taxation 

or Equalization 

 • State Department of Commerce for Minority

 Business Development 

 • State Employment Commission or Employment 

Security Agency

 • State Department of Economic Development for 

 Business Regulation 

 • Governor’s Office of Community and Industrial 

Development

 • Governor’s Office of Minority and Small Business 

Development 

 • Small Business Development Centers and Business 

Resource Centers 

 

viii
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-1

Lesson 1

Business Tax Requirements

To successfully operate your business, it is necessary to become 

familiar with federal, state, and local reporting requirements. This 

section of the workbook discusses the record keeping

requirements, the advantages and disadvantages of different types 

of business organization, and reporting requirements for each 

type’s federal income tax returns. Be sure to contact the state and 

local taxing authorities to determine their reporting requirements.

Business owners may be required to obtain a federal employer 

identification number to identify tax reports filed with the IRS. 

You may apply for an EIN by completing Form SS-4, APPLICATION 

FOR FEDERAL EMPLOYER IDENTIFICATION NUMBER. Afterwards, you 

may call, fax, or mail Form SS-4 to obtain your EIN by contacting 

the location that processes your state. Numbers are listed in Form 

SS-4’s separate instructions. The application process will be 

discussed in more detail in Lesson 2.

You are required to keep records so that you can prepare accurate 

tax returns. You must keep receipts, sales slips, invoices, bank 

deposit slips, canceled checks and other documents to 

substantiate items of income, deductions and credits. Recording

these items in journals and ledgers will help you pay only the tax 

you owe.

Good records can help you:

 • Identify source of receipt. You may receive cash or property 

 from many sources. Unless you have recordsshowing the 

source of your receipts, you may not be able to prove that

some are non-business or nontaxable.

• Prevent omission of deductible expenses. You may forget 

 expenses when you prepare your tax return, unless

 you record them when you incur or pay them.

 

 • Establish earnings for self-employment tax purposes. 

 Your records should show the amount of earnings reportable 

 for self-employment tax purposes. Self-employment tax is 

 explained later, under BUSINESS RETURNS.

 • Explain items on income tax return. If IRS examines your 

Introduction

Employer 

Identification 

Number (EIN) 

XX –123456X

Recordkeeping
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-2

 income tax return, you may be asked to explain the items 

 reported. You must be able to support items on your return 

with sales slips, invoices, receipts, bank deposit slips,

canceled checks and other documents. These items of support 

 are necessary if you are to have adequate and complete 

 records.

The record keeping rules require that you keep adequate 

documentary records or sufficient evidence to support your own

statements, such as receipts and a log or diary, for:

 • deductions you take for travel, transportation, 

 entertainment and business gift expenses

 • any deduction you take for certain business property.

These records should substantiate the amount you claim, the time

and place, the business purpose and your business relationship to

any other persons involved. Incomplete records may not be enough 

for the deduction to be allowed. If your records are lost due to 

circumstances beyond your control, such as by flood or

earthquake, you may substantiate a deduction by reasonable

reconstruction. For more informationabout recordkeeping, see 

Publication 583, STARTING A BUSINESS AND KEEPING RECORDS. 

Always keep your business records available for examination by 

the Internal Revenue Service.

You must keep your records as long as their contents may be

material in the administration of any Internal Revenue Service law.

To support items of income

or deduction on your tax

return, you must keep

records until the statute of

limitations for that return

expires. Ordinarily, the

statute of limitations for an

income tax return expires 3

years after the return is due or filed, or 2 years from the date the 

tax is paid, whichever is later.

In many cases you must keep records indefinitely. For example, if

you change your method of accounting, records supporting the

necessary adjustments may remain material for an indefinite time.

Caution: Adequate

Records

How Long To Keep

Records

Supporting

Records
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-3

You must keep records relating to the basis of property for as long 

as they are material in determining the basis of the original or

replacement property. Refer to Table 3, Period of Limitation in 

Publication 583 for retention timeframes.

You must keep all employment tax records for at least 4 years after

the date on which a tax return becomes due or the tax is paid, 

whichever is later. For more information, refer to Publication 15,

EMPLOYER’S TAX GUIDE (Circular E).

Keep copies of your filed tax returns. They will help you with

computing and preparing your future tax returns or if you need to 

correct what is on file by preparing an amended return. Previously 

filed tax forms mayalso be helpful to the executor or administrator 

of your estate.

Many people who operate their own, one-person, business never 

bother to set up a business bookkeeping system separate from their

personal system. Their personal checking account serves as both a 

personal and a business account. IRS recommends that you open a 

separate business bank account.

You may use either a single entry or double-entry system of

bookkeeping. The single-entry system is the simplest to keep.

With the single-entry system, you record a daily and a monthly

summary of business income and a monthly summary of business

expenses. Single entry is not a complete accounting system, but it 

shows income and expenses in sufficient detail for tax purposes. 

This system focuses on the business’ profit and loss statement and 

not on its balance sheet. An example of a double-entry system is 

shown in Publication583.

The double-entry system has built-in checks and balances and is 

more accurate than single-entry system. The double-entry system 

is self-balancing. Since all business transactions consist of an 

exchange of one thing for another, double-entry bookkeeping is 

used to show this two-fold effect.

In journals and ledgers, you record every transaction as a debit 

entry in one account and as a credit entry in another account. After 

you post the journal entries to the ledger accounts, prepare a trial 

balance sheet. The total debits must equal the total credits.

On your return you must use the same accounting method you use 

Employment Tax

Records

Tax Returns

Bookkeeping

Systems

Accounting 

Methods
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-4

to keep your records. Your accounting method is a set of rules that 

you use to decide when and how you report your income and 

expenses. 

The two most commonly used accounting methods are the cash

method and the accrual method. Under the cash method, you

report all income in the year you receive it. You usually deduct

expenses only in the tax year in which you pay them. Under the

accrual method, you report income in the year you earn it, 

regardless of when you receive the payment. You deduct expenses 

in the tax year you incur (assume liability for) them, regardless of 

when you pay them. If your business has an inventory, the rules 

have recently changed. Prior to 2000, if you had inventory, you 

generally had to use the accrual method for purchases and sales. 

Now, if your business has annual gross profits of $1 million or 

less, you are permitted to use the cash method of accounting. For 

more information, see Publication538, ACCOUNTING PERIODS AND

METHODS.

There are several computer software packages that you can use for

Record keeping. They can be purchased in many retail stores.

These packages are very useful and relatively easy to use, and they 

require very little knowledge of bookkeeping and accounting.

Note: If you use a computerized system, you must be able to

produce sufficient legible records from the system to

provide the information needed to determine your correct 

tax liability. Be sure to print a hard copy that matches 

your data on disks.

An income statement, also called a cash flow analysis, provides a

perspective of your company’s revenues, costs and profitability. A 

cash flow analysis is a detailed monthly account of how money 

flows into your business in the form of income and flows out of 

your business in the form of expenses. Subtracting expenses from 

income gives you a monthly result of how well your business is 

doing. (See Exhibit 1.1 on page 1-5.)

A balance sheet, on the other hand, provides a snapshot of the

company’s net worth at the present time. As the name implies, 

assets must balance or equal liabilities must equal net worth.

 (See Exhibit 1.2 on Page 1-6.)

 

Income Statement and Balance Sheet
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-5

EXHIBIT 1.1 - CASH FLOW ANALYSIS (INCOME STATEMENT)
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-6

EXHIBIT 1.2 - BALANCE SHEET
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-7

One of the major considerations that must be made when deciding 

to go into business or after you have operated for a short length of 

time is the structure of ownership. So let’s review the advantages 

and disadvantages of the five types of business organizations as 

well as the federal tax forms that must be filed to report their 

income. The five types of business organizations are: Sole 

proprietors, partnerships, limited liability companies, corporations 

and S-corporations. 

A sole proprietorship is an unincorporated business that one

individual owns. It is the simplest type of business

organization. The business does not exist apart from the proprietor 

(owner). The proprietor assumes the risks of the business to the 

extent of all of his or her assets, whether or not the assets are used 

in the business. If both husband and wife jointly own and operate 

the business, a partnership exists.

Advantages:

1. The business is simple to organize.

2. The owner has maximum freedom to make decisions.

3. The business has a minimum of legal restrictions.

4. The owner receives all the profits.

5. The business is easy to discontinue.

Disadvantages:

1. The owner has unlimited liability. The individual owner is

legally liable for all debts of the business. Creditors may attach

all of the entire owner’s assets, even personal assets not used in 

the business.

 2. Usually the ability to finance the business(capital) is limited to 

whatever the owner can secure or produce personally. This 

feature may limit the expansion of a business when new capital 

is required. A common cause of failure for this form of 

business organization is its original lack of capital. Limited 

capital restricts the ability of a sole proprietor to operate the 

business effectively and survive at an initial low profit level, or 

to get through an economic rough spot. For more information 

Types of Business Organizations

Sole Proprietorship
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-8

about sole proprietorships, see Publication 334, Tax Guide for 

SMALL BUSINESS.

A sole proprietor (single owner) and a single member of a 

Limited Liability Company, LLC, file either Schedule C-EZ or

C, NET PROFIT FROM BUSINESS, with their Form 1040 to report 

the profit or loss from operating their businesses. Exhibit 1.3 

and 1.4 are examples of Schedule C-EZ and Schedule SE, SelfEmployment Tax. A Schedule SE, SELF-EMPLOYMENT TAX,

must be filed to report the Social Security and Medicare Taxes 

on net profits of $400 or more. Self-employment tax is covered 

later in this lesson. A filled-in Schedule C example is shown on 

Exhibits 1.10 and 1.11.

Sole Proprietors

(and Some Single 

Member LLCs) 

File Schedule C
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-9

Exhibit 1.3 Sole Proprietorship – Schedule C-EZ and Schedule SE
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-10

Exhibit 1.4 Sole Proprietorship – Schedule C and Schedule SE Pub 334 pages 41-43
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-11

A partnership is a relationship

between two or more persons

who join together to carry on a

trade or business. Each person

contributes money, property,

labor or skills, and each expects

to share in the profits and losses

of the business. Any number of

persons may join in a partnership.

For the purpose of income

taxes, a partnership includes a

syndicate, group, pool, joint venture or other unincorporated

organization that carries on a business and that is not classified as a 

trust, estate or corporation.

Advantages:

1. It is easy to organize.

2. It may have greater financial strength than a sole

proprietorship.

3. It combines managerial skills and judgments of the partners.

4. It has a definite legal status.

5. Each partner has a personal interest in the business.

Disadvantages:

1. The liability of the partners is usually unlimited. Each partner

may be held liable for all the debts of the business. Therefore, 

if one partner does not exercise good judgment, that partner

can cause not only the loss of the partnership’s assets, but also 

the loss of the other partners’ personal assets.

2. The authority for decisions is divided.

Profits or losses from operations are reported by

Partnership’s (and LLCs taxed as partnerships) on Form 1065, U.S. 

PARTNERSHIP RETURN OF INCOME, an information return that

summarizes the business activity of the partnership. The 

partnership gives each partner a Schedule K-1 (Form 1065), 

PARTNER’S SHARE OF INCOME, CREDITS, DEDUCTIONS, ETC. Then each 

partner uses their Schedule K-1 to complete Part II of Schedule E 

(Form 1040), SUPPLEMENTAL INCOME AND LOSS, and any other forms 

Partnership

Partnerships (and 

LLCs Taxed as 

Partnerships) File 

Form 1065
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-12

and schedules the partner must file with his or her individual 

return. A sample Form 1065 is shown in Publication 541. 

Exhibits 1.5 through 1.7 are an example of a Schedule K-1 and 

Schedules E. For more information about partnerships, see 

Publication 541, the Instructions to Forms 1065, Partnership 

Income Tax Return and the Form 1040 Instructions for Schedule 

E.
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-13

EXHIBIT 1.5 -SCHEDULE K-1 (FORM 1065), PAGE 1 
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-14

EXHIBIT 1.6 - SCHEDULE K-1 (FORM 1065), PAGE 2 
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-15

EXHIBIT 1.7 - Schedule E
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-16

All states have enacted laws recognizing limited liability 

companies. An LLC is a separate legal entity you form by filing 

articles of organizationwith a state’s Secretary of State. LLCs (and 

similar entities called Limited Liability Partnerships – LLPs) 

combine certain features of partnerships with the limited liability 

feature and other features of corporations. 

.

The individual members are not personally liable for the LLC’s or

LLP’s debts or liabilities, except to the extent of their investment

and capital commitment in the company. It is important to note

that an LLC/LLP is not a federal tax entity and is generally

treated as a partnership by IRS. A single-member LLC can be

treated as a “disregarded entity” for tax purposes, even though

still respected as separate for legal purposes. Thus, if owned by an

individual, such an entity can be reported as a Schedule C sole

proprietorship on the owner’s personal tax return. File Form 8832, 

ENTITY CLASSIFICATION ELECTION, to state the type of limited 

liability business organized. For more information on the legal 

aspects of LLCs/LLPs, contact your Secretary of State’s office. For 

tax information, see IRS Publication541, PARTNERSHIPS, or the 

Instructions for Form 1065, PARTNERSHIP RETURN.

An S Corporation is a small business corporation whose 

shareholders elect to have corporate income taxed in a manner 

similar to that of a partnership. Organizing shareholders of a 

corporation who wish to avoid double taxation may elect to file 

Form 2553, ELECTION BY A SMALL BUSINESS CORPORATION, to be 

recognized as an S corporation. This election must be submitted 

within the first 75 days of the tax year to be permitted for the 

current tax year. Otherwise, the election is effective for the next 

tax year. Generally, an S corporation does not pay tax on income 

resulting from daily operation. Instead, the income and expenses 

of the corporation are divided among its shareholders (limited to 

75), who then report them on their own income tax returns. 

However, an S corporation does pay taxes on capital gains realized 

when corporate assets are sold. 

An S-corporation has the combined advantages and disadvantages 

of the partnership and regular corporations.

S corporations file Form 1120S, U.S. INCOME TAX RETURN FOR AN S 

CORPORATION, and only pay tax on any items that are not passed to 

shareholders. The S corporation gives each shareholder a Schedule 

K-1 (Form 1120S), SHAREHOLDER’S SHARE OF INCOME, CREDITS, 

DEDUCTIONS, ETC. (See Exhibit 1.8 on pages 1-19 and 1-20). The 

shareholder uses the Schedule K-1 to complete Part II of Schedule 

Limited Liability

Company (LLC)

S Corporation 

Files 

Form 1120S

S Corporation
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-17

E (Form 1040), and any other forms and schedules the shareholder 

must file with his or her individual return. Refer to the Instructions 

for Form 1120S for more information, also see the Instructions for 

Form 1120S, and Form 2553. Also see Form 1040 Instructions for 

Schedule E, Part II.

For more information about S corporations, see the Instructions for 

Form 1120S and Form 2553.

The law treats a corporation as a legal entity. It has a life

separate from its owners and has rights and duties of its own. The

owners of a corporation are the stockholders. The managers of a

corporation may or may not be stockholders. Forming a 

corporation involves a transfer of money or property, or both, by 

the prospective shareholders in exchange for capitalstock in the 

corporation. For the purpose of federal income tax, corporations 

include associations, joint stock companies and trusts and 

partnerships that actually operate as associations or corporations.

Advantages:

1. The life of the business is perpetual.

2. The stockholders have limited liability.

3. Transfer of ownership is easy (sale of stock).

4. It is easier for corporations to raise capital and to expand

 than it is for other forms of business.

5. Management may be more efficient.

6. It is adaptable to both small and large businesses.

Disadvantages:

1. It is subject to tax on its income at the corporate level 

and when the income is distributed as dividends, it is taxed 

again to the shareholder.

2. It may be more difficult and expensive to organize than 

 other forms of ownership. It is wise to consult an accountant 

and attorney specializing in corporate law.

3. The corporate charter filed with the Secretary of your state 

restricts the types of business activities.

4. It is subject to many state and federal controls.

In forming a corporation, a business must organize by applying for 

a charter through the Secretary of State’s office where the principal 

Corporation 
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-18

business activity will occur. To increase its financial ability, the 

charter permits corporations to sell stock to numerous 

shareholders/owners. The corporation is empowered to create 

debts separate from the shareholders. 

A corporation takes the same deductions for expenses as a sole 

proprietor. Special deductions are also available to corporations. 

Profits of the corporation are taxed to the corporation on either 

Form 1120-A, U.S. CORPORATION SHORT -FORM INCOME TAX RETURN

or Form 1120, U.S. CORPORATION INCOME TAX RETURN, as well as to 

the shareholders if the profits are distributed. However,

shareholders cannot take a loss if the corporation does not operate 

at a profit. See Exhibit 1.9 for Form 1120-A.

If the corporation paid dividends during the year, it gives each 

shareholder a Form 1099-DIV, STATEMENT FOR RECIPIENTS OF 

DIVIDENDS AND DISTRIBUTIONS. A shareholder who works for the 

corporation is an employee. The corporation gives each employee 

a Form W-2, WAGE AND TAX STATEMENT . The shareholders and 

employees use these Forms 1099 DIV and W-2 to complete their 

individual returns, Form 1040. Publication 542, Corporations, 

contains additional guidelines.

For more information about corporations, see Publication 542, 

CORPORATIONS.

Corporation Files 

Either

Form 1120 or

1120-A
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-19

EXHIBIT 1.8 - SCHEDULEK-1 (FORM 1120S), PAGE 1

2002 FORM NOT AVAILABLE
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-20

EXHIBIT 1.8 - SCHEDULE K-1 (FORM 1120S), PAGE 2
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-21

Exhibit 1.9 Form 1120-A 

 

2002 FORM NOT AVAILABLE
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-22

To figure estimated taxes and to report income earned from your 

business, you must figure your profit or loss. Profit is the amount 

on which you will pay tax. If you operated at a loss, the amount is

entered in parenthesis and will reduce other income. The basic way 

to determine profit or loss is the same for each type of business 

organization.

 Gross Income – Expenses = Net profit or loss

You will use this formula with some slight changes to determine 

your profit or loss on your tax return. This workbook expands the 

formula by discussing gross receipts and cost of goods sold, both 

of which are used in determining gross income for either type of 

business. Since many new businesses start as a sole proprietor, the 

following illustrates the preparation of Schedule C, Profit or Loss 

From Business (Sole Proprietor).

Gross receipts or sales are the income that a business receives from 

sales of its products or services. Gross receipts less returns and 

allowances equal net sales. In the example illustrated in this 

lesson, John’s Furniture Store sales for the year were $48,000 with 

neither returns nor allowances. Therefore, the store had $48,000 in

both gross receipts (line 1) and net receipts (line 3).

Cost of goods sold is the cost to a business to buy or make the 

product that it sold. It is easy to figure the cost of goods sold if you 

sell all your merchandise during the year. However, some of your 

sales will probably be from inventory that you carried over from 

earlier years and you will probably have inventory left unsold at 

the end of the year.

To figure the cost of goods sold, start with the value of the 

inventory on hand at the beginning of the year. Add the cost of 

goods purchased or manufactured during the year. Subtract the 

cost of any merchandise withdrawn for personal use. The result is 

the cost of items available for sale during the year. Then subtract 

the value of your inventory at the end of the year; your cost of 

goods sold is the remainder. This can be stated by the following 

formula:

 Beginning inventory 

 + Purchases

 = Cost of items Available 

 - Ending inventory 

 = Cost of goods sold

For example, John’s Furniture Store shows the following in Part III 

of Schedule C: an inventory of $12,000 at the beginning of the 

Net Profit or 

Loss

Gross Receipts or

Sales

Cost of Goods Sold
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-23

year (line 35), purchased furniture costing $26,000 during the year 

(line 36) and an ending inventory of $9,800 (line 41). The cost of 

goods sold was $28,200 (line 42) that is also written on line 4 in 

Part 1 of Schedule C. Using the formula, this is stated as:

Beginning inventory $12,000

 + Purchases + 26,000

 = Cost of items Available = 38,000

 - Ending inventory - 9,800

 = Cost of goods sold = 28,200

Gross profit equals the net receipts (the balance of gross receipts

less returns and allowances) less the cost of goods sold. John’s 

Furniture Store had gross (and net) receipts of $48,000 (lines 1 and 

3) and the cost of goods sold was $28,200(line 4). The store’s 

gross profit was $19,800 ($48,000 – $28,200 = $19,800) on line 7 

of Schedule C. After you determine the income, you must 

determine the expenses, which is the other item in the formula for 

computing profit or loss.

Business expenses are the ordinary and necessary expenses for the 

operation of a business. The cost of business property that has a 

life of more than 1 year, such as a truck or a building, is not 

considered a current business expense. That cost is usually 

deducted on your tax return over a number of years as depreciation 

(discussed later). John’s Furniture Store had total expense of 

$11,000 of which $10,800 was current business expenses and $200 

was depreciation. This would be reported on his line 28 of the 

Schedule C. 

Net profit or loss is the amount by which the gross profit and any 

other income for a period is more (or less, in the case of a loss) 

than the business expenses and depreciation for the same period. 

John’s Furniture Store had a gross profit of $19,800 (line 7) and 

business expenses of $11,000 (line 28). The store’s net profit was 

$8,800 ($19,800– $11,000 = $8,800) on line 31 of Schedule C. A 

sole proprietor or member of a partnership must pay selfemployment taxes on the net profit; in this example, on the $8,800. 

The computation of the self-employment tax is on Schedule SE. A 

filled-in Schedule C and SE, the forms for a sole proprietorship, 

are shown as examples. (See Exhibits 1.10, 1.11 and 1.12.) 

Note: You may be able to file the shorter Schedule C-EZ,

if you meet certain requirements. For more 

information, see Schedule C-EZ and Exhibit 1.13 

on page 1-27.

Business 

Expenses

Gross Profit

Net Profit or Loss
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-24

EXHIBIT 1.10 - SCHEDULE C, P G. 1, JOHN MARTIN EXAMPLE
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-25

EXHIBIT 1.11 - SCHEDULE C, P G. 2, JOHN MARTIN EXAMPLE
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-26

EXHIBIT 1.12 - SCHEDULE SE, J OHN MARTIN EXAMPLE
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-27

EXHIBIT 1.13 -BLANK SCHEDULE C-EZ
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-28

Business Tax Returns

Self-employed people who are sole proprietors or partners in a 

partnership are subject to self-employment (SE) tax if they have 

$400 or more in net earnings from self-employment income. In 

2002, the tax rate for self-employment tax is 15.3% of which 

12.4% is social security (old age, survivors and disability 

insurance) plus 2.9% for Medicare (hospital insurance). As an 

employee, you pay one half of these taxes and your employer pays 

the other one half. If you are also an employee, you may still be 

required to pay these taxes on self-employed income.

Income passed through to shareholders of an S Corporation is

not subject to self-employment tax.

Note: The maximum net earnings subject to the social security 

 tax for 2002 is $84,900. There is no maximum limit on the

 amount subject to the 2.9% Medicare tax.

If you receive wages in 2002 from which Social Security and

Medicare taxes are withheld, subtract those wages from the

maximums to figure how much self-employment income is subject

to the taxes. For example, in 2002 you receive wages of $50,000

from your employer and net $35,000 in self-employment income. 

You would first subtract your wages, $50,000, from the social

security maximum, of $84,900. Only $34,900 of your selfemployment income is subject to the 12.4% Social Security portion 

of the self-employment tax. All of the $35,000 is subject to the 

2.9% Medicare Tax.

If you have income subject to self-employment tax, figure the tax

on Schedule SE (Form 1040), SELF-EMPLOYMENT TAX. If you have

more than one business, use one Schedule SE and combine the

profits and losses from all of your businesses. You must file 

Schedule SE if:

 • your net earnings from self-employment are $400 or more,

or

 • you had church employee income of $108.28 or more. 

Note: If you are a member of the clergy or a religious worker, 

you may not have to pay self-employment tax if you meet

certain exemption requirements.

Self-Employment 

Tax
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-29

Schedule SE is shown later in this lesson. For more information,

see Form 1040 Instructions and Publication 533, SELF-EMPLOYMENT

TAX.

Many sole proprietors, partners and S corporation shareholders 

must pay estimated taxes during the year. To determine if you must 

pay it, estimate your taxable income for the year. Include your 

self-employment income and all other taxable income. Also 

estimate how much of your income will be subject to withholding.

Your estimated tax is the amount by which the total of your

estimated income tax and self-employment tax exceeds the tax you 

expect to have withheld from your wages, if any. You do not have 

to pay estimated tax if you reasonably expect your estimated tax 

owed to be less than $1,000.

Use the worksheet that comes with

Form 1040-ES, ESTIMATED TAX FOR

INDIVIDUALS, or the Annualized

Worksheet in Publication 505, 

TAX WITHHOLDING AND ESTIMATED

TAX, to figure the amount and decide

if you must payestimated tax.

Corporations figure their estimated

tax on Form 1120-W (Worksheet),

ESTIMATED TAX FOR CORPORATIONS.

Estimated Tax
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-30

In place of deductions for expenses to reduce the profit of the 

business, a business may elect to claim all or part of the eligible 

business expense as a tax credit. Although both deductions and 

credits lower your tax, they differ. Deductions are subtracted from 

income, and credits are subtracted from tax. Often it is best to 

compute the item each way-as a deduction, then a new 

computation omitting the item as an expense, but figuring it as a 

credit. Select the method that accurately gives the greater benefit. 

Caution: the same expense and dollar amount cannot be used for 

both a deduction and credit.

The Work Opportunity Credit (Form 5884) and the Welfare -

to-Work Credit (Form 8861) are of particular interest to those 

who already have, or are thinking about having, employees. The 

Work Opportunity Credit provides an incentive to hire individuals 

from targeted groups that have a particularly high unemployment 

rate or other special employment needs. The amount of the credit

depends on when the individual began working for you, generally

before January 1, 2004. For more information, see Form 8861, 

WELFARE-to-WORK CREDIT.

The Welfare-to-Work Credit is a credit that you can take for

qualified wages you pay to qualified long-term family assistance

recipients who started working for you after December 31, 1997

and before Janua ry 1, 2004.

You must receive certification from your state employment 

security agency before claiming either credit. Submit Form 8850, 

PRESCREENING NOTICE AND CERTIFICATION REQUEST FOR THE WORK

OPPORTUNITY AND WELFARE-TO-WORK CREDITS , no later than 21 

days after the employee begins working for you. For more 

information, see Publication 954, TAX INCENTIVES FOR 

EMPOWERMENT ZONES AND OTHER DISTRESSED COMMUNITIES contains 

the requirements for these and other credits.

Travel expenses are the ordinary and necessary expenses for 

traveling overnight away from home in the course of your trade or

business. These expenses include the cost of public transportation,

operating and maintaining your car, meals, lodging and other

related expenses.

Business Deductions and Credits

Travel,

Transportation 

and

Entertainment

Expenses
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-31

Transportation expenses are the ordinary and necessary expenses

of getting from one workplace to another in the course of your

business or profession, while you are not away from home. 

Business entertainment expenses are deductible only if they are

ordinary and necessary expenses of carrying on your trade or

business and you can prove them.

For more information, see Publication 334 and Publication 463,

TRAVEL, ENTERTAINMENT , GIFT AND CAR EXPENSES.

If you use a car for business only, you may base your deductionon 

the full cost of operating it. If you use the car for both business and 

personal purposes, you must divide your expenses betweenthose 

uses on the basis of mileage to compute a business percentage. Do 

not include commuting to and from work as business mileage.

You may take a deduction for your actual business expenses for

the car, or use a standard mileage rate. However, to use the 

standard mileage rate on a vehicle after the first year of business 

use, you must have used the standard mileage rate the first year. In 

later years you can alternate between standard mileage and actual 

expenses. This alternating option is not available to you if actual 

expenses are claimed the first year of business use. Under either 

system, parking fees, and tolls are deductible. Actual business 

expenses include gas, oil, repairs, insurance, depreciation, tires and 

license plates. In 2001, the standard mileage rate was 34.5¢ per 

business mile, the rate increased to 36.5 cents for the year 2002.

For more information, refer to Publication 463 also read 

Publication 946, HOW TO DEPRECIATE PROPERTY.

If you use part of your home in your business regularly and 

exclusively, you may be able to claim part of the expenses of 

maintaining your home as a business expense. Special rules apply 

if you use part of your home as a day care center or to store 

inventory. These expenses include mortgage interest, insurance,

utilities, repairs and depreciation or rent. The business use of your 

home must meet certain other requirements before you can take 

any of these expenses as business deductions.

To deduct your expenses for business use of your home if you are 

self-employed, use Schedule C (Form 1040) and Form8829, 

EXPENSES FOR BUSINESS USE OF YOUR HOME. An employee must use 

line 20 ofSchedule A (Form 1040), to itemize this miscellaneous 

deduction. For more information, see Publication 587, BUSINESS 

USE OF YOUR HOME, and Lesson 4 in this workbook.

Car Expenses

Business Use of 

Your Home
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-32

If you establish a retirement arrangement for yourself and/or your

employees, you may be able to take a deduction for your

contributions to the plan. The plans discussed here are popular

among up-and-coming businesses.

As a plan for yourself, you can establish a traditional individual

retirement arrangement (IRA) or the new Roth IRA. If you are a

sole proprietor or a member of a partnership, you can have a

qualified plan. If requirements are met, you may not be taxed on 

certain amounts you pay into the plan, or on the plan’s earnings, 

until they are distributed to you in future years. Many employers 

elect to include employees in their qualified plan.

If you have employees, both you and they can set up simplified 

employee pensions (SEPs). A SEP is a kind of IRA that was 

designed for employers whose employees have worked for them at 

least 3 years; the SEP has very few administrative burdens or costs.

You can set up and contribute up to 15% of his or her earnings to a 

SEP for each of your employees, then deduct the contribution (up 

to $40,000 for the 2002 tax year).

Another option is you can set up a savings incentive-matching plan 

for employees called a SIMPLE plan if you have 100 or fewer 

employees and meet several other requirements. Under this plan, 

the employer makes contributions to employees’ IRAs. The two 

types of plans are the SIMPLE IRA and SIMPLE 401(k).

For more information on these pension plan options, see 

Publication 590, INDIVIDUAL RETIREMENT ARRANGEMENTS (IRAS) AND 

QUALIFIED PLANS and Publication 560,

RETIREMENT PLANS FOR SMALL BUSINESS (SEP, SIMPLE AND 

QUALIFIED PLANS).

If not otherwise covered by an employer’s subsidized health 

insurance plan, you may be able to deduct 70% (100% in the years 

2003 and later) of the amount you paid for medical insurance for 

yourself and your family. You deduct this amount in the 

“Adjustment” section on the front of on line 28 of Form 1040 

(2001). For more information including a worksheet, see Chapter 7 

in Publication 535, BUSINESS EXPENSES.

Start-up costs are those expenses that you have in connectionwith 

setting up an active trade or business, or for investigating the 

possibility of creating or acquiring an active trade or business. 

Retirement Plans

Health Insurance

Deduction for the

Self-Employed

Business Start-Up

Costs
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-33

Generally, you can amortize these costs over a 60-month period 

after you begin operating your business. For more information, see 

Chapter 9 of Publication 535.

If you buy property for use in your business that has a life of more 

than 1 year, you may deduct its cost or other basis over a number 

of years. This practice is called depreciation. Do not depreciate 

land, inventory, or property you placed in service and disposed of 

in the same year.

You can depreciate property that meets all of the following basic

requirements:

• the property must be used in business or held for the 

 production of income,

• the property must have a determinable useful life which must 

 be longer than one year, and

 • the property must be something that wears out, decays, gets 

 used up, becomes obsolete or loses value from natural causes.

The method for depreciating most tangible property placed in

service after 1986 is the Modified Accelerated Cost Recovery

System (MACRS). Note: Tangible property is any propertythat 

can be seen or touched, like buildings, cars, machinery or

equipment.

You can choose to deduct a limited amount (for 2000, up to

$20,000; for 2001 and up to $24,000 for 2002 tax year) of the cost 

of certain depreciable property in the year you buy it for use in 

your business. This deduction is known as the “section 179 

deduction.”

Use Form 4562, DEPRECIATION AND AMORTIZATION, to figure your

section 179 deduction. Publication 946 explains what costs youcan 

and cannot deduct, how to figure the MACRS deduction for 

depreciation and Section 179 and when to recapture the

deductions. 

Pub.535 discusses specific business expense deductions and Pub.

954, TAX INCENTIVES, discusses credits you may be eligible to claim 

towards reducing federal taxes on profits of your business.

Depreciation and 

Section 179

Depreciation of

Business Property

Section 179 Deduction
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-34

EXHIBIT 1.11 - PROFIT OR LOSS AND DISTRIBUTION OF INCOME COMPARISON
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-35

EXHIBIT 1.12 - BUSINESS REQUIREMENTS AT A GLANCE

 
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-36

All IRS forms and publications can be downloaded from the

INTERNET at www.irs.gov/prod/forms_pubs/index.html

ordered free by calling 1-800-829-3676. Or, you can buy a 

CDROM of current and prior year tax forms and publications from

the National Technical Information Service (toll free at 1-877-233-

6767 or on-line at www.irs.gov/cdorders. You can also get forms 

via fax. (From your fax machine dial 703-368-9694.)

MOST COMMONLY USED FEDERAL TAX FORMS 

REQUIRED TO BE SENT TO IRS Reading the publications 

that precede the forms and instructions to the forms provide help to 

prepare these forms. View all of the publications with your own 

copy of Publication 1796 Tax Products. This CDROM contains all 

of the forms and publications mentioned in this workbook. 

Publication 1796 can be ordered, a fee may be charged. To read a 

summary of each publications content and to learn more about 

IRS, read Publication 910, IRS GUIDE TO FREE TAX SERVICES .

Publication 1, YOUR RIGHTS AS A TAXPAYER

Publication 15, Circular E, EMPLOYER’S TAX GUIDE

Publication 15-A, EMPLOYER’S SUPPLEMENTAL TAX GUIDE

Publication 15-B, EMPLOYER’S TAX GUIDE TO FRINGE BENEFITS

Form 940, Federal Unemployment Tax,

Form 941, Employers Quarterly Tax Return

Publication 51, Circular A, AGRICULTURAL EMPLOYER’S TAX GUIDE

Form 943, Employer’s Annual Tax Return for Agriculture 

Employees

Publication 225, FARMER’S TAX GUIDE

Forms 1040 (Schedules A, D, F, J, SE), 4136, 4562, 4684,

4797, 6251

Publication 334, TAX GUIDE FOR SMALL BUSINESS (FOR INDIVIDUALS 

WHO USE SCHEDULE C OR C-EZ)

Publication 535, BUSINESS EXPENSES

Form 1040 (Schedules C, C-EZ (Profit and Loss for Sole 

Proprietors

Publication 378, FUEL TAX CREDITS AND REFUNDS, 

Forms 720 Quarterly Federal Excise, 4136 Credit Tax on Fuel, 

8849 Sales by Gasoline Wholesale Distributors

Publication 463, TRAVEL, ENTERTAINMENT, GIFT AND CAR

EXPENSES

Forms 2106, 2106EZ Employee Business Expenses

Publication 505, TAX WITHHOLDING AND ESTIMATED TAX

Estimated Tax Payments Forms 1040-ES, 2210, 2210F, Federal 

Tax Withholding W-4, W-4P
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-37

Publication 509, TAX CALENDARS FOR 2002

Publication 510, EXCISE TAXES FOR 2002

Forms 11-C (Registration for Wagering), 637, 720Quarterly

Federal Excise Tax, 730 Tax on Wagering, 6197 Gas Guzzler, 

6627 Environmental Tax

Publication 533, SELF-EMPLOYMENT TAX

Form 1040 (Schedule SE) Self-Employment Tax Publication 

534, DEPRECIATING PROPERTY PLACED IN SERVICE BEFORE 1987

Publication 946 HOW TO DEPRECIATE PROPERTY (Section 179, 

MACRS, Listed Property)

Form 4562, Depreciation and Amortization

Publication 536, NET OPERATING LOSSES

Form 1045, Application for Tentative Refund

Publication 537, INSTALLMENT SALES

Form 6252, Installment Sales

Publication 538, ACCOUNTING PERIODS AND METHODS

Form 1128, Application to Adopt, Change or Retain a Tax Year

Form 3115, Application for Change in Accounting Method

Form 8716, Elections to Have a Tax Year Other Than a Required 

Tax Year

Publication 541, PARTNERSHIPS

Form 1065 (Schedule K-1) U.S. Return of Partnership Income

Publication 542, CORPORATIONS

Forms 1120, 1120-A U. S. Corporation Income Tax Return

Publication 544, SALES AND OTHER DISPOSITIONS OF ASSETS

Form 1040 (Schedule D Capital Gains and Losses), Form 4797 

Sale of Business Property, Form, 8824Like-Kind Exchanges

Publication 547, CASUALTIES, DISASTERS AND THEFTS (BUSINESS & 

NON-BUSINESS)

Form 4684, Casualties and Thefts Section B-Business/Income 

Producing Property

Publication 551, BASIS OF ASSETS

Publication 552, RECORDKEEPING FOR INDIVIDUALS

Publication 553, HIGHLIGHTS OF 2001 TAX CHANGES

Publication 556, EXAMINATION OF RETURNS, APPEAL RIGHTS AND

CLAIMS FOR REFUND

Publication 557, TAX-EXEMPT STATUS FOR YOUR ORGANIZATIONS

Forms 990, 990-EZ, 990-PF (Returns of OrganizationExempt 

from Tax), Packages 1023, 1024 (Recognition of Exemption 

under Section 501 (c) (3) or 501 (a)

Publication 560, RETIREMENT PLANS FOR SMALL BUSINESS

Forms 5305-SEP, 5304-SIMPLE, 5305-SIMPLE and 5500EZ

Publication 564, MUTUAL FUND DISTRIBUTIONS

Forms 1040, (Schedules B Interest/Dividend Income , D Capital 

Gains (Sales), 1099-DIV Dividends and Distributions

Publication 575, PENSION AND ANNUITY INCOME
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-38

Forms 1040, 1040A, 1099-R Distributions –

Pensions/Annuities/Profit Sharing/IRAs, 4972 Tax on Lump 

Sum Distributions

Publication 583, STARTING A BUSINESS AND KEEPING RECORDS

Publication 587, BUSINESS USE OF YOUR HOME

(INCLUDING USE BY DAY-CARE PROVIDERS)

Form 8829 Business Use of Home (INCLUDING USE BY DAY-CARE 

PROVIDERS)

Publication 590, INDIVIDUAL RETIREMENT ARRANGEMENTS (IRAS)

(INCLUDING ROTH IRAS AND EDUCATION IRAS)

Forms 1040, 1040A, 1099-R Distributions –

Pensions/Annuities/Profit Sharing/IRAs,, 5329 Additional 

Taxes on Qualified Plans, 8606 Nondeductible IRAs

Publication 594, THE IRS COLLECTION PROCESS

Publication 595, TAX HIGHLIGHTS FOR COMMERCIAL FISHERMEN

Forms 1040 (Schedule C), 1099-MISC Miscellaneous Income

Publication 598, TAX ON UNRELATED BUSINESS INCOME OF

EXEMPT ORGANIZATIONS

Form 990-T Exempt Organization – Business Income Tax 

Return

Publication 908, BANKRUPTCY TAX GUIDE

Forms 982, Reduction of Tax Attributes Due to Discharge of 

Indebtedness... 1040 U.S. Individual Income Tax Return, 1041 

U.S. Income Tax Return for Estates and Trusts

Publication 910, GUIDE TO FREE TAX SERVICES

Publication 911, DIRECT SELLERS

Form 1040 (Schedules C Profits and Loss from Business, SE 

Self Employment Tax)

Publication 925, PASSIVE ACTIVITY AND AT-RISK RULES

Form 8582, Passive Activity Loss Limitations

Publication 939, GENERAL RULE FOR PENSIONS AND ANNUITIES

Publication 946, HOW TO DEPRECIATE PROPERTY

Form 4562, Depreciation and Amortization

Publication 947, PRACTICE BEFORE THE IRS AND POWER OF ATTORNEY

Forms 2848, Power of Attorney and Declaration of 

Representative, 8821 Tax Information Authorization

Publication 1244, Employees Daily Record of Tips and Report to 

Employer contains

Forms 4070, 4070-A

Publication 1518, TAX CALENDAR FOR SMALL BUSINESS

Publication 1542, PER DIEM RATES

Publication 1544, REPORTING CASH PAYMENTS OF OVER $10,00

(RECEIVED IN A TRADE OR BUSINESS)

Form 8300, Report of Cash Payments Over $10, 000 Received 

in Trade or Business

Publication 1546, THE TAXPAYER ADVOCATE SERVICE OF THE IRS
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 1

1-39

Publication 1853, BUSINESS TALK

Publication 3991, Highlights of Job Creation and Worker 

Assistance Act of 2002
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 2

 

 This lesson introduces federal 

 employment taxes. It briefly

Lesson 2 

Employment Taxes 

Introduction

explains your responsibilities as 

an employer to withhold and 

pay these taxes, and it gives 

other related information.

Employment taxes represent the 

income tax and social security

and Medicare taxes (FICA 

taxes) withheld from the wages 

of an employee plus the 

employer’s share of social

security taxes and employer paid 

federal unemployment (FUTA) taxes. The withheld

(employee’s) portions of employment taxes are referred to as “trust

fund” taxes. 

At the end of this lesson you will be able to: Objectives

1. Determine an employer’s responsibility for income tax

 withholding, social security and Medicare (FICA) taxes 

 and federal unemployment (FUTA) taxes. 

2. Determine the need for various forms related to 

 employment taxes. 

3. Determine the need for forms related to non-employee/ 

 miscellaneous payments. 

2-1
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 2

 

Employer Identification Number (EIN) 

When you start or buy a business, you may need to apply for an 

EIN to identify the tax returns of your business. If you don’t 

already have an EIN, you need to get one if you: 

• pay wages to employees, 

• are required to withhold taxes for nonwage payments, 

• have a self-employed retirement plan, 

• operate your business as a corporation, partnership or 

• are required to file any of these tax returns: 

 - employment, 

- excise, 

 - fiduciary or

 - alcohol, tobacco and firearms. 

Note: If you are a sole proprietor with no employees and don’t

meet any of the listed filing requirements, you do not need 

an EIN. If you need a number solely to identify your 

business’s bank account, do not apply for an EIN but use 

your social security number (SSN) instead. This will save 

both you and the IRS paperwork and unnecessary 

correspondence. 

Form SS-4 If you have not applied for an EIN and you are required to have 

one, you should obtain Form SS-4, APPLICATION FOR EMPLOYER 

IDENTIFICATION NUMBER, from the IRS. (See Exhibit 2.1.) The 

completed application should be mailed to the Internal Revenue

Service Campus where you file your federal tax returns. 

Fill out the SS-4 with the information requested in each box that 

applies. 

Use your EIN on all the items you send to the IRS and Social 

Security Administration (SSA).

2-2
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 2

 

You should have only one EIN for yourself as a sole proprietor. 

For example, if you operate more than one sole proprietorship, you 

must use the same number for each. If you take over another 

employer’s sole proprietorship, do not use that employer’s EIN. If

you have an EIN, use it. If not, apply for one. 

Once you have received an EIN, you use it from one year to the 

next. If you change your business from a sole proprietorship, for 

example, to a corporation or partnership, apply for a new EIN. If

you haven’t received your number by the time a return is due, 

write “Applied for” and the date applied for in the EIN space.

Note: Each separate partnership and corporation must 

 have its own EIN. 

Apply for your EIN well before your tax returns are due to allow 

for IRS processing time. You may be able to obtain an EIN sooner 

by telephone or fax. See the instructions for Form SS-4 and 

Publication 1635, UNDERSTANDING YOUR EIN, for more 

information. 

2-3
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 2

 

EXHIBIT 2.1 - BLANK FORM SS-4 

2-4
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 2

 

 

Employer/Employees

It is important to know whether you are considered an employer

for tax purposes. A person or organization may be an employer for 

purposes of one kind of tax but not for another. A person who 

works for you may be classified as a common-law employee, a 

statutory employee or an independent contractor. The classification 

of the person determines which forms you must file, which taxes 

you must pay and deposit requirements. For more information 

on these classifications, see Publication 15-A, EMPLOYER’S 

SUPPLEMENTAL TAX GUIDE. 

Generally, anyone who performs services for you is your employee

if you can control what will be done and how it will be done. This 

is so even when you give the employee freedom of action. What 

matters is that you have the right to control the details of how the 

services are performed. Publication 15-A has more information on 

how to determine whether an individual providing services is an 

independent contractor or an employee. 

To get a determination from the IRS as to whether or not a worker

is an employee, file Form SS-8, DETERMINATION OF EMPLOYEE WORK 

STATUS FOR PURPOSES OF FEDERAL EMPLOYMENT TAXES AND INCOME 

TAX WITHHOLDING. 

2-5
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 2

 

An independent contractor performs services for you, but is not 

under your direct control. Generally, people in business for 

themselves are not employees. For example, doctors, lawyers, 

veterinarians, construction contractors and others in an 

independent trade in which they offer their services to the public

are usually not employees. However, whether such people are 

employees or independent contractors depends on the facts in each 

case. The general rule is that an individual is an independent 

contractor if you, the employer, have the right to control or direct 

only the result of the work and not the means and methods of 

accomplishing the result.

Independent 

Contractors

See Publication 15-A for more information.

2-6
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 2

 

Form W-4 To know how much federal income tax to withhold from an 

employee’s wages, you should have a Form W-4, EMPLOYEE’S 

WITHHOLDING ALLOWANCE CERTIFICATE, on file for each employee. 

The amount to be withheld is determined by the employee’s gross 

wages and the information submitted by the employee on Form W4. (See Exhibit 2.2.) 

This information includes: 

 • employee’s marital status; 

 • number of withholding allowances claimed; 

• employee’s request to have additional tax withheld or 

 • employee’s claim to exemption from withholding. 

Ask each new employee to give you a signed Form W-4 by his or 

her first day of work. This certificate is effective with the first 

wage payment and will last until the employee files a new 

certificate. 

If an employee does not give you a Form W-4, withhold tax as if 

the employee were a single person who has claimed no 

withholding allowances. If not enough tax is withheld and your 

employee has not provided a Form W-4 or has claimed an 

Exemption from withholding, he or she may be subject to 

penalties. An employee who claims exemption from withholding

must renew his or her status by filing a new Form W-4 with you by

February 15 of each year. 

Note: Student status does not automatically exempt the

 employee from income tax withholding.

Generally, Forms W-4 are for your records. They need not be sent 

to IRS unless: 

 • the employee claims more than 10 withholding allowances 

or

 • the employee normally earns more than $200 per 

week and claims exemption from withholding on Line 7. 

For more information on withholding, see Publication 505, TAX

WITHHOLDING AND ESTIMATED TAX. You can help your employees 

determine whether they are having the right amount of income tax

withheld by ordering copies of Publication 919, HOW DO I ADJUST 

MY TAX WITHHOLDING? 

2-7
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 2

 

EXHIBIT 2.2 - BLANK FORM W-4, PAGE 1

 

2-8
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 2

 

EXHIBIT 2.2 - BLANK FORM W-4, PAGE 2

2-9
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 2

 

Form I-9

All U.S. employers must verify the employment and identity of all 

employees hired to work in the United States. Both you and the 

employee must complete the Immigration and Naturalization 

Service (INS) Form I-9, EMPLOYMENT ELIGIBILITY 

VERIFICATION. (See Exhibit 2.3.) Employers must maintain 

completed I-9s in their own files for three (3) years after the date

of hire or one (1) year after the date employment ends, whichever 

is later. You can get the form from INS offices, by calling 1-800-

829-3676 or by visiting the INS Web site at www.ins.usdoj.gov. 

Call the INS at 1-800-375-5283 for more information about your 

responsibilities.

 EXHIBIT 2.3 - BLANK FORM I-9 

2-10
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 2

 

Information 

Returns 

Form 1099-MISC

You do not withhold income tax or social security and Medicare 

taxes from, or pay social security and Medicare taxes or federal 

unemployment tax on amounts you pay an independent 

contractor/nonemployee. Generally, if you pay at least $600 during

the year to an independent contractor/nonemployee for services 

(including parts and materials) performed in the course of your 

business, you must furnish a Form 1099-MISC (Miscellaneous 

Income) to that person by January 31 of the following year. (See

Exhibit 2.4.). 

You will need the social security number or EIN of an independent 

contractor in order to complete Form 1099-MISC. If the 

independent contractor is a sole proprietor, their SSN is preferred. 

Always ask the independent contractor to complete Form W-9,

REQUEST FOR TAXPAYER IDENTIFICATION NUMBER AND CERTIFICATION, 

before beginning work. (See Exhibit 2.5.) If you do not obtain an 

SSN or EIN before you pay the contractor, you must withhold 

income tax from the payment. This is called backup withholding. 

Backup withholding rules require that 30% of the payment be 

withheld. Report the backup withholding on Form 945, ANNUAL

RETURN OF WITHHELD FEDERAL INCOME TAX, discussed in Lesson 3.

 EXHIBIT 2.4 - BLANK FORM 1099-MISC

2-11
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 2

 

Note: Do not report payments to corporations on Form 1099- 

MISC unless you are reporting payments for medical, 

health or legal services. For additional information on 

 1099 reporting requirements refer to the Instructions for 

 Forms 1099, 1098, 5498 and W2G. 

 EXHIBIT 2.5 - BLANK FORM W-9 

Form W-2 You must furnish a copy of Form W-2, WAGE AND TAX 

STATEMENT, to each employee to whom you paid wages during

the year. (See Exhibit 2.6.) 

Form W-2 must show total wages and other compensation paid 

(even if not subject to withholding); total wages subject to social 

security and Medicare taxes; allocated tips (if any); amounts 

deducted for income, social security and Medicare taxes; and the 

total advance earned income credit payment (discussed later). In all 

cases, you must give each of your employees the statement by

2-12
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 2

 

January 31 following the end of the calendar year covered. If not 

computer-generated, every effort should be made to ensure that 

Forms W-2 provided to employees are legible. 

If employment ends before the close of the year, the employee may

request the form earlier. You must give the employee a Form W-2 

within 30 days of the employee’s request or within 30 days of the 

final wage payment, whichever is later. 

You should keep any undeliverable employee copies of Form W-2 

(Copies B and C) as part of your records for 4 years. 

 EXHIBIT 2.6 - BLANK FORM W-2

 

2-13
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 2

 

 

Income Tax The wages you pay your employees generally are subject to 

income tax withholding if their wages for any payroll period are 

more than the dollar amount of their withholding allowances for 

that period. The amount to be withheld is figured separately for 

each payroll period. Wages include all pay you give an employee

for services performed. The pay may be in cash or in other forms. 

It includes salaries, vacation allowances, bonuses, commissions 

and fringe benefits not excluded by law. It does not matter how 

payments are measured or paid. Wages paid in any form other than 

money (such as goods, lodging and meals) are measured by the fair 

market value. See Publication 15, EMPLOYER’S TAX GUIDE (Circular

E) for more information about income tax withholding and 

requirements to deposit withheld taxes. 

Tipped 

Employees 

Tips your employees receive are generally subject to withholding. 

Each employee who receives at least $20 in tips in a month must 

report to you all tips they receive. This report must be made by the 

10th day of each month following the month in which the tips are 

received. Tips that an employee receives directly from customers 

and tips that charge customers add to the bill and you pay to the

employee must be reported. Your employee reports the tips on 

Form 4070, EMPLOYEE’S REPORT ON TIPS TO EMPLOYER, or a similar

form. See Publication 1244, EMPLOYEE’S DAILY RECORD OF TIPS AND 

REPORT OF TIPS TO EMPLOYER, which includes Form 4070, for more 

information. 

Note: There are special tip reporting requirements for large 

food and beverage establishments. These businesses 

provide food and beverages for consumption on the

premises, tipping is customary, and they usually employ 

more than 10 employees on a typical business day. These 

rules affect only the reporting requirements. 

The income tax to be withheld is figured on gross wages before 

any deductions are made for social security and Medicare taxes, 

pension, union dues, insurance, etc. You may figure the 

withholding by different methods, the most common of which are 

the percentage method and the wage bracket tables method. 

Publication 15 contains the applicable tables and instructions for 

using both of these withholding methods, and it gives more 

information on reporting and withholding requirements on wages 

and tip income. 

All Employees 

2-14
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 2

 

Social Security and Medicare Taxes

Under the Federal Insurance Contributions Act (FICA), you must 

withhold social security and Medicare taxes from wages that you 

pay your employees each payroll period. 

Generally, meals, lodging, clothing, services and other payments in 

kind are subject to social security and Medicare taxes, as are wages 

paid in cash. However, meals are not taxable wages if furnished for 

the employer’s convenience and on the employer’s premises. 

Lodging is not taxable if furnished for the employer’s convenience, 

on the employer’s premises and as a condition of employment. 

You, as an employer, must withhold and deposit the employee’s 

part of the taxes and pay a matching amount. The social security

tax is withheld from the employee’s gross wages until the

employee’s cumulative wages for the year reach the wage base 

limit. Any wages above the wage base limit are not subject to 

social security tax withholding. However, there is no wage base

limit for Medicare tax; all covered wages are subject to 

Medicare tax. 

For 2002, the limit for wages subject to social security tax is 

$84,900. The social security tax rate is 6.2% for the employee and 

6.2% for the employer (12.4% total). The Medicare tax rate for the 

employee is 1.45% and 1.45% for the employer (2.9% total). This 

means that in 2002 you are to withhold employee social security

and Medicare taxes at the total rate of 7.65% (6.2% up to $84,900 

plus 1.45% for all wages) and pay, or deposit, 15.30% (the total of 

the employee share and the employer’s matching share of 7.65%). 

Federal Unemployment Tax

The Federal Unemployment Tax Act (FUTA) provides for the 

states and the Federal Government to cooperate in establishing and 

administering an unemployment tax program. Most employers pay

both a federal and a state unemployment tax. The federal 

unemployment program was enacted to encourage the states to

provide payment to workers who have lost their jobs. Only the 

employer pays FUTA tax; it is not deducted from an employee’s 

wages. For 2002, federal unemployment tax is figured on the first 

$7,000 you pay to each employee during the year. See Publication 

15 and the INSTRUCTIONS FOR FORM 940 for more 

information. 

2-15
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 2

 

If you acquired all or substantially all of the property used in the 

business of another employer, you may, in figuring the wage limit 

for social security and federal unemployment tax purposes, include 

the wages that employer paid to the employees who continue to 

work for you. 

Successor 

Employer

Earned 

Income 

Credit (EIC)

The EIC is a tax credit for certain workers whose earned income is

below a certain level. Because it is a “credit,” the EIC is subtracted

from the amount of tax owed. Even workers who have not filed a 

tax return in the previous year, because their wages were below the 

minimum income-level requirements to file, may be able to receive

the credit — but only if they file a tax return. Therefore, you must 

notify each employee who worked for you at any time during the 

year, and from whom you did not withhold any income tax, about 

the EIC. You will meet the notification requirements by giving the

employee either Notice 797, POSSIBLE REFUND ON YOUR FEDERAL 

INCOME TAX RETURNS BECAUSE OF THE EARNED INCOME CREDIT (EIC);

your own written statement as long as it has the exact wording of

Notice 797; or the official IRS Form W-2, WAGE AND TAX 

STATEMENT, which contains a statement on the back of Copy C. 

Exception: You do not need to notify those employees who 

claimed exemption from withholding on Form W-4, EMPLOYEE’S 

WITHHOLDING ALLOWANCE CERTIFICATE. 

An employee who expects to earn less than $29,201 in 2002 and 

has a qualifying child can receive advance payments of up to 60% 

of the maximum credit for one qualifying child. For 2002, this is 

$1,503. To claim the advance EIC, eligible employees must 

provide you a properly completed Form W-5, EARNED INCOME

CREDIT ADVANCE PAYMENT CERTIFICATE. (See Exhibit 2.7.) You use 

the advance EIC tables in Publication 15 each payroll period to

figure the correct amount of advance payment to include in the 

employee’s pay. For depositing purposes, the advance payment 

first reduces the withheld income tax and then the employee and 

employer social security and Medicare taxes, thereby reducing

your total tax liability.

Reminder: Do not continue advance EIC payments to an 

employee on wages of less than $29,201 ($30,201 if married 

filing jointly) in 2002. 

For more information, see Publication 15. 

Note: In 2002, an employee’s advance EIC payments are limited 

to a total of $1,503, although the credit may be more. 

They will have to claim any additional amount of EIC on 

their tax return. 

2-16
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 2

 

EXHIBIT 2.7 - BLANK FORM W-5 

2-17
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 2

 

Form W-3 and

Form 1096 

Each year, you must file Form W-3, TRANSMITTAL OF WAGE 

AND TAX STATEMENTS, in order to transmit Copy A of Forms 

W-2 to the Social Security Administration by the last day of

February after the calendar year for which the Forms W-2 are 

prepared. The Social Security Administration will process these

forms and provide the IRS with the income tax data that it needs 

from those forms. The mailing address for the forms is on Form

W-3. 

Note: The totals on the Form W-3 you file each year 

 should equal the total of all Forms 941 filed for 

 the year. 

Form 1096, Annual Summary and Transmittal of U.S. Information 

Returns, is used to transmit copy A of Forms 1099, 1098, 5498 and 

W-2G to the Internal Revenue Service. You must file Form 1096 

with each type of return by February 28. If you file electronically, 

you may file by March 31. 

In completing all transmittal documents (Forms W-3 and 1096) 

and information returns, you must use the same taxpayer 

identification number regardless of whether you file transmittals 

from more than one location. (See Exhibits 2.8 and 2.9.) 

Use the same name on transmittals and information returns that

you use on the income tax return or other returns you file under the 

same taxpayer identification number.

If information returns are prepared at different business locations, 

or if you are engaged in business with a “doing business as” (dba) 

name, there must be two name lines. The first name line contains 

the primary name (name shown on the income tax return). The

second name line identifies the specific business location or is the 

“dba” name. 

2-18
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 2

 

Example 1 A business has two different locations: 

Able Industries EIN: 10-0101010 

Shareholder Relations Dept. 

333 Main Street 

Mapleville, MO 33333 

Able Industries EIN: 10-0101010 

Western Office

222 Metropolitan Avenue

Miliville, UT 22222 

The following taxpayers have “dba” names: Example 2 John Oak 

Maple City Auto Repair 

123 Main Street 

Maple City, NC 11111 

Jane Apple 

Hometown Accounting Service

25 Cherry Street

Rosewood, OR 99999 

2-19
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 2

 

EXHIBIT 2.8 - BLANK FORM W-3

2-20
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 2

 

EXHIBIT 2.9 - BLANK FORM 1096 

2-21
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 2

 

If there is an error on Forms W-2 or W-3, correct by filing Form

W-2c, CORRECTED WAGE AND TAX STATEMENT, and Form W-3c, 

TRANSMITTAL OF CORRECTED OF CORRECTED WAGE AND TAX 

STATEMENTS. (See instructions on the forms for detailed 

instructions)

Correcting Forms W-2 and W-3 

Filing on Magnetic Media or Electronically 

Generally, the Social Security Administration will accept magnetic

media or electronic records of Copy A for Forms W-2 or W-3 with 

prior approval. See the separate INSTRUCTIONS FOR FORM W2 or W-3 for details about required magnetic media filing. If you 

file 250 or more Forms W-2 or 1099, you must file them on 

magnetic media or electronically. The 250 requirement applies 

separately for each type of information return and separately for 

each type of corrected return. When filed electronically, the due 

date is March 31 instead of February 28 to submit the forms. 

The IRS encourages filers to transmit information returns 

electronically because it is generally more cost effective and easier 

than paper or magnetic media. To participate in the program, filers

must submit a Form 4419, APPLICATION FOR FILING INFORMATION

RETURNS MAGNETICALLY/ELECTRONICALLY, at least 30 days before

the due date of the return(s) for current year processing. 

Information 

Reporting 

Call Site

The IRS operates a centralized call site to answer questions about 

reporting on Forms W-3, W-2, 1096 and 1099 and other 

information returns. If you have questions related to reporting on 

information returns, you may email them to mccirp@irs.gov or 

call 1 (866) 455-7438 (toll-free), Monday through Friday, 8:30 

A.M. to 4:30 P.M. (EST). 

2-22
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 2

 

Penalties The following is a list of ten penalties that may be assessed for not 

complying with certain filing and payment requirements: 

1. Failure to file. 

2. Failure to pay.

3. Dishonored check. 

4. Failure to timely file an information return with IRS or SSA. 

5. Failure to timely furnish a copy of any information return to 

the payee. 

6. Failure to file a partnership return. 

7. Failure to make Federal Tax Deposits on time in an authorized

government depository. 

8. Failure to furnish specific information on an information 

return, such as including taxpayer identification numbers. 

9. Failure to collect and/or pay over Trust Fund taxes (Trust Fund 

Recovery Penalty). 

10. Failure to make deposits electronically if required to do so. 

Putting It All Together

In this lesson you: 

▪ briefly studied employment taxes; 

▪ reviewed the Employer Identification Number (EIN);

▪ learned the definitions of “employee” and “independent contractor” for tax

purposes; 

▪ learned about Forms W-4, I-9 and information Forms 1099- MISC, W-9 and W-2; 

▪ learned about Forms W-3 correct errors on Forms W-2 and W-3; 

▪ read about transmitting Forms W-3, W-2, 1096 and 1099 on magnetic media or 

electronically and 

▪ learned about 10 penalties that may be assessed for not complying with certain 

filing and payment requirements. 

2-23
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 2

 

In this lesson you were introduced to the following subjects: 

▪ federal income tax withheld from employees; 

▪ social security and Medi-care taxes (withheld from employees and paid by

employers) and federal unemployment taxes; 

• successor employer and 

 • Earned Income Credit.

2-24
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 2

 

Exercises

Exercise 1 

Bill Bean started a dry cleaning business and hired two employees. 

What form does he use to get an employer identification number?

___________________________ 

Exercise 2 

What form will your employee complete and give to you for you to 

determine how much income tax to withhold?

__________________________ 

Exercise 3 

(A) What are the social security tax and Medicare tax rates 

 on an employee’s salary in 2002?

 (1) Social security tax rate ______% 

 (2) Medicare tax rate ______% 

 

(B) What is the employer’s share of each? __________ 

(C) What is the 2002 wage base limit for social 

 security? $_____________ 

(D) What is the limit for Medicare? _______________ 

Exercise 4 

(A) What form will you give to each employee to show 

 wages paid, social security, Medicare and income 

 taxes withheld? ___________________________ 

(B) When is it due to the employee? ________________ 

Exercise 5 

What form will you give an unincorporated independent contractor

to whom you paid $600 or more for services in the course of your 

trade or business?______________ 

2-25
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 2

 

Exercise 6

If you make payments to an unincorporated independent 

contractor who does not give you his or her identifying number, at 

what rate will you withhold taxes on the

payments?______% 

Exercise 7 

Mary Smith, your employee, wants advance payments of 

earned income credit added to her wages. What form should she 

complete and give to you? _______________ 

Exercise 8 

What forms will you use to correct a Form W-2 that is in 

error?______________ and ________________ 

(Answers found on page A-1.)

2-26
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 3

 

Lesson 3 

Part I: Form 941, Employer’s 

Quarterly Federal Tax Return 

Introduction If you are an employer who is required to withhold income or 

social security and Medicare taxes, you must file a return reporting

the amounts withheld. Form 941, EMPLOYER’S QUARTERLY FEDERAL 

TAX RETURN, is used for this purpose. However, other forms are 

used in certain circumstances. (See Exhibit 3.1 on page 3-4.) 

If you are a sole proprietor and file Form 941 for business 

employees, you may include household employees on the form. 

Also, if you operate a farm for profit and file Form 943, 

EMPLOYER’S ANNUAL TAX RETURN FOR AGRICULTURAL EMPLOYEES, for 

your agricultural employees, you may include farm household 

workers on that form. 

Form 945, ANNUAL RETURN OF WITHHELD FEDERAL INCOME 

TAX, is used to report income tax withheld from non-payroll 

payments, such as pensions, IRAs, gambling winnings and backup 

withholding. 

Publication 15, EMPLOYER’S TAX GUIDE (Circular E), explains the 

rules and methods for withholding, paying, depositing and 

reporting federal income tax, social security and Medicare taxes 

and federal unemployment (FUTA) tax on wages, tips and fringe 

benefits. It also explains who is an employee, what are taxable 

wages and what are taxable tips. 

Publication 15-A, EMPLOYER’S SUPPLEMENTAL TAX GUIDE, 

provides specialized information supplementing the basic 

employment tax information provided in Circular E, such as a 

more detailed discussion on the employment tax treatment of 

fringe benefits and information on how to report third-party sick 

pay.

Publication 15-B, EMPLOYER’S TAX GUIDE TO FRINGE BENEFITS, 

contains detailed information on fringe benefits and their exclusion 

and valuation rules. 

3-1
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 3

 

At the end of this lesson, you will be able to: Objectives 1. Determine Form 941 deposit requirements. 

2. Prepare a Form 941. 

References Publication 15, EMPLOYER’S TAX GUIDE (Circular E) 

Publication 15-A, EMPLOYER’S SUPPLEMENTAL TAX GUIDE

Publication 15-B, EMPLOYER’S TAX GUIDE TO FRINGE BENEFITS 

Due Dates for Filing Form 941

Form 941 

Form 941 is due the last day of the month after each quarter ends. 

The return filing dates are listed below: 

Due Dates for Filing Form 941 

Quarter Ends Due Date

January, February, March Mar. 31 Apr. 30* 

April, May, June June 30 July 31* 

July, August, September Sept. 30 Oct. 31* 

October, November, December Dec. 31 Jan. 31* 

*If the due date for a return falls on a Saturday, Sunday or 

legal holiday, the due date is the next business day.

3-2
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 3

 

If you paid the quarterly tax payments in full, you are allowed an 

additional 10 days to file the return. For example, your return for 

the quarter that ends on June 30 would be due on August 10 

instead of July 31. 

Do not file more than one 

Form 941 per quarter and do 

not report more than one

calendar quarter on a return. 

Seasonal employers are not

required to file for quarters 

when they regularly have no tax

liability because they have paid 

no wages. To alert the IRS that

you will not have to file a return

for one or more quarters during

the year, check the seasonal employer box above line 1 on Form 

941 each time you file. The IRS will mail two Forms 941 to you 

once a year after March 1. The preprinted name and address 

information will not include the date the quarter ended. You must 

enter that date when you file the return. 

If you are not a seasonal employer, but you receive a preaddressed 

Form 941 for a quarter in which you have no employees or may

have temporarily stopped paying salaries, file a return anyway. 

This ensures that you will continue to receive Form 941 from the 

campus. 

If you cease to do business or pay wages, you need to file a final 

return. The instructions for Form 941 give information on how to 

file if you sell, transfer or merge your business with another 

business. 

Always use the preaddressed form mailed to you. If you do not 

receive a preaddressed form, print or type your name and address 

exactly as shown on the previous return unless the information has 

changed. 

The date your quarter ends and your EIN must also be shown. If

you have not yet received notification of your EIN, write “Applied 

for” and the date you applied in the space provided for the EIN. 

3-3
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 3

 

EXHIBIT 3.1 - BLANK FORM 941, EMPLOYER’S QUARTERLY FEDERAL TAX Return 

 

3-4
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 3

 

Form 941

3-5

Complete the state code boxes if you made your deposits in a state 

other than that shown in your address on Form 941. Enter the state 

code for the state where you made deposits in the box provided in 

the upper left corner of the form. Enter code “MU” in the box if 

you deposit in more than one state. If you deposit in the same

state as shown in your address, do not make an entry. If you 

deposited electronically (discussed on page 3-10) do not make an 

entry here. 

Complete lines 1 through 17, if applicable. Specific Form 941 line 

entries are discussed below. More complete information on these

line entries is contained in the instructions for Form 941. 

Line 1. 

Make an entry for the pay period including March 12, on the 1st

quarter (January–March) return only.

Line 2. 

Enter the total of: all wages paid, tips reported, taxable fringe

benefits provided and other compensation paid to your employees, 

even if you do not have to withhold income tax or social security

tax on it. Do not include contributions to employee plans that are 

excluded from the employee’s wages (e.g., section 401(k) and 125 

plans). 

Line 3. 

Enter the income tax you withheld on wages, tips, taxable fringe

benefits and certain other payments. 

Line 6a. 

Taxable social security wages. Enter the total wages subject to

social security taxes that you paid your employees during the 

quarter. Also include any sick pay and taxable fringe benefits 

subject to social security taxes. Stop reporting when an employee’s 

wages (including tips) reach the wage base ($84,900 in 2002). 

Multiply by the applicable percentage printed on the line.

Line 6c. 

Taxable social security tips. Enter all tips your employees reported 

during the quarter, until tips and wages for an employee reach the

wage base amount ($84,900 in 2002). Do this even if you were not 

able to withhold the employee social security tax. See the Form 

941 instructions for details on how to make an adjustment for 

uncollected social security tax on tips. 

Line 7a. 

Taxable Medicare wages and tips. Report all wages and tips, 

including any sick pay and taxable fringe benefits subject to 

Medicare tax. There is no limit on the amount of wages subject to 
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 3

 

Medicare. 

Line 8. 

Total social security and Medicare taxes. Check the box if none of 

the wages are subject to social security or Medicare taxes. 

Line 9. 

Adjustment of social security and Medicare taxes. A fractions-ofcents adjustment is the small difference that may occur between 

net taxes (line 13) and total deposits (line 14), because of rounding

to the nearest cent each time you computed payroll. This rounding

occurs when you figure the amount of social security and Medicare

taxes to be withheld from each employee’s wages.

To determine if you have a fractions-of-cents adjustment, multiply

the total wages and tips for the quarter by the applicable

percentage and compare these amounts with the total social 

security and Medicare taxes actually withheld from your payroll 

records. The difference, positive or negative, is your fractions-ofcents adjustment. 

See Publication 15 for instructions on other adjustments. 

 Line 12. 

Enter any advance EIC payments made to employees. 

Line 13. 

Net taxes. Make sure the line equals line 17, column (d) below (or 

line D of Schedule B (Form 941)). (See Exhibit 3.2 on page 3-7.) 

Note: If line 13 is $2,500 or more, check the appropriate box 

below Line 16 indicating your depositor status. 

3-6
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 3

 

EXHIBIT 3.2 - FORM 941, SCHEDULE B, EMPLOYER’S RECORD Federal TAX LIABILITY

3-7
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 3

 

Monthly Summary of Federal Tax Liability 

3-8

Report on line 17 your employment 

tax liability for each month based on 

the date the corresponding wages 

were paid, not when the payroll 

period ends. If your total taxes 

for the quarter are $2,500 or 

more, you must instead complete

a separate Schedule 

B, EMPLOYER’S RECORD OF

FEDERAL TAX LIABILITY, page 3- 

7 (Exhibit 3.2). 

Tax liability is income tax

withheld plus both the employee and employer shares of social

security and Medicare taxes, minus any advance earned income 

credit (EIC) payments. 

Filing by Other Methods

You may be able to file Form 941 by phone if you meet certain 

criteria. On-line filing through a personal computer is also an

option. 

Reporting Agents who file Forms 941 for groups of taxpayers can 

file them electronically or on tape. See Lesson 5 and Publication 

15-A for details. 

Beginning in January 2003, tax professionals can file 941 returns 

electronically. The tax professional must be an authorized e-file

provider. See Publication 3112 for more information. 

Now that you have covered the background information, you will 

learn how deposits are made, how information is entered on the 

form and how the tax due is figured. 

In general, you must deposit income tax withheld and both the 

employer and employee social security and Medicare taxes (minus 

any advance EIC payments) using the Electronic Federal Payment 

System (EFTPS) or by mailing or delivering a check, money order

or cash to an authorized financial institution or Federal Reserve

bank with Form 8109, FEDERAL TAX DEPOSIT COUPON. Some 

taxpayers are required to deposit using EFTPS. 

Depositing Requirements 
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 3

 

Payment With

Return

You may make a payment with Form 941 instead of depositing it if 

your net tax liability (reduced by any advance earned income

credit) during the quarter (line 13 of Form 941) is less than $2,500. 

(Exhibit 3.3) See Publication 15 for exceptions. 

EXHIBIT 3.3 - FORM 941, PAYMENT VOUCHER

There are two deposit schedules – monthly or semiweekly – for 

determining when you deposit social security, Medicare and 

withheld income taxes. These schedules tell you when a deposit is 

due after a tax liability arises (e.g., when you have a payday).

When to 

Deposit 

Your deposit schedule for a calendar year is determined from the

total taxes (not reduced by any advance EIC payments) reported on 

your Forms 941 (line 11) in a four-quarter lookback period. The 

lookback period for Form 941 filers begins July 1 and ends June 

30. (See Exhibit 3.4.) If you reported $50,000 or less of taxes for 

the lookback period, you are a monthly schedule depositor; if you 

reported more than $50,000 you are a semiweekly schedule 

Lookback 

Period 

depositor. 

EXHIBIT 3.4 – LOOKBACK PERIOD FOR CALENDAR YEAR 2002 

 

3-9

 

 Lookback Period

2000 2001 

July 1 Oct. 1 Jan. 1 April 1

    

Sept. 30 Dec. 31 Mar. 31 June 30

2002 



Calendar Year

 

 Jan.-Dec. 

Lookback Period for Calendar Year 2002 
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 3

 

 

Monthly Deposit

Schedule 

Under the monthly deposit schedule, deposit Form 941 taxes on 

payments made during a month by the 15th day of the following

month. 

Note to new employers: During the first calendar year of your

business, your tax liability for each quarter, in the lookback period, 

is considered to be zero. Therefore, you are a monthly schedule 

depositor for the first calendar year of your business unless the 

$100,000 Next-Day Deposit rule (discussed on page 3-11) applies. 

You are a semiweekly schedule depositor for a calendar year if the 

total taxes on Form 941 (line 11) during your lookback period 

were more than $50,000. If the payday falls on Wednesday, 

Thursday and /or Friday, you must deposit the Form 941 taxes no 

later than the following Wednesday. (See Exhibit 3.5 below.) If the 

payday falls on Saturday, Sunday, Monday and/or Tuesday,

deposit by Friday. 

Semiweekly 

Deposit

Schedule 

EXHIBIT 3.5 – SEMIWEEKLY DEPOSIT SCHEDULE 

 

Semiweekly Deposit Schedule

IF the day falls on a... THEN deposit taxes by the 

following... 

Wednesday, Thursday

and/or Friday Wednesday

Saturday, Sunday, 

Monday and/or Tuesday Friday

Application of

Monthly and 

Semiweekly 

Schedule 

The terms “monthly schedule depositor” and “semiweekly

schedule depositor” do not refer to how often your business pays

its employees or even how often you are required to make deposits. 

These terms identify a set of deposit rules you must follow when

employment tax liability occurs and are based on the date wages 

are paid.

3-10
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 3

 

$100,000 NextDay 

Deposit Rule

If you accumulate a tax liability (reduced by any advance EIC 

payments) of $100,000 or more on any day during a deposit 

period, you must deposit the tax by the next banking day,

regardless of whether you are a monthly or semiweekly schedule 

depositor. The term deposit period refers to the period during

which tax liabilities are accumulated for each required deposit due

date. For monthly schedule depositors, the deposit period is a 

calendar month. If you are a monthly depositor and become subject 

to the rule, you become a semiweekly depositor for the remainder

of the year and all of the following year. 

The two methods of depositing employment taxes are by

EFTPS and by using Federal Tax Deposit (FTD) coupons (Form 

8109). 

You are required to make electronic deposits using EFTPS of all 

your tax liabilities in 2002 if your total deposits of all federal

depository taxes were more than $200,000 in 2000 or if you were

required to use EFTPS in 2001. For more details, see Publication 

15 and Lesson 5. 

If you are not required to use EFTPS, you can make your required 

deposits at an authorized financial institution or Federal Reserve

bank (FRB) using FTD coupons. (See Exhibit 3.6 on page 3-12). 

The IRS will issue you a book of coupons 5 to 6 weeks after you 

receive your EIN.

Note: Even if you are not required to make electronic

tax deposits, you may voluntarily participate in EFTPS. 

To enroll, call 1-800-945-8400 or 1-800-555-4477. 

An employer may be penalized for using the wrong deposit 

method. Always ensure your deposits are timely because late 

deposits are subject to penalties. Check with your local depository

or FRB for information concerning their cutoff time (exact hour 

they start dating deposits as received on their next banking day). 

3-11
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 3

 

EXHIBIT 3.6 – BLANK FORM 8109, FEDERAL TAX DEPOSIT COUPON 

 

Example Smith Enterprises, Inc.

EIN: 10-1614316 

1512 Poplar St. 

Inn, MI 48200 

*Social security and Medicare taxes referred to as FICA.

Quarterly Totals $13,750 $1,051.88 $1,051.88 $1,146.00 

3/31/02 3 4,200 321.30 321.30 340.00

2/28/02 4 4,750 363.38 363.38 406.00

1/31/02 4 $4,800 $367.20 $367.20 $400.00

Period Number of Gross *FICA *Employer’s Income Tax

Ending Employees Wages Withheld FICA Withheld

Smith Enterprises, Inc., as a monthly depositor, must deposit each

month’s taxes by the 15th of the following month ($1,134.40 by

February 15; $1,132.76 by March 15 and $982.60 by April 15). If

the total taxes for all three months of the quarter had been less 

than $2,500, then they could have been deposited or paid with the 

Form 941 to be filed by April 30, 2002. 

(Exhibit 3.7 on page 3-12 uses this information to complete Form 

941.) 

3-12
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 3

 

EXHIBIT 3.7 – FORM 941, EMPLOYER’S QUARTERLY FEDERAL TAX Return

D

e

p

o

s

i

t

s

n

o

t

m

a

d

e

i

n

a

t

i

m

e

l

y

n 

m

a

Helen Smith

3-13
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 3

 

Deposits not made in a timely manner may be subject to penalties. Deposit 

Penalties

For amounts not properly or timely deposited, the penalty rates are: 

• 2% - Deposits made 1 to 5 days late. 

• 5% - Deposits made 6 to 15 days late. 

 

• 10% - Deposits made 16 or more days late. 

 

• 10% - Deposits made at an unauthorized financial 

institution, paid directly to the IRS or paid with 

your tax return. See Publication 15 for exceptions. 

• 10% - Amounts that are subject to electronic deposit 

 requirements but not deposited using EFTPS. 

• 15% - Amounts still unpaid more than 10 days after the date of 

the first notice the IRS sent asking for the tax due or the 

day on which you receive notice and demand for 

immediate payment, whichever is earlier.

Correcting 

Form 941

Errors made in figuring taxes in an earlier quarter can be corrected 

on a current Form 941 by making an adjustment to the current 

quarter’s taxes. Circular E describes in detail how to correct errors 

to income tax withholding, social security and Medicare taxes. 

 Note: You may not adjust or claim a refund or credit for any 

 overpayment of income tax that you withheld or deducted 

 from an employee in a prior year. But see Circular E for 

 information on administrative error adjustments.

 In this lesson, you studied: Summary

• Form 941 and its due dates, 

• deposit requirements, 

• the method of depositing taxes due and 

• some of the sections and lines of Form 941. 

Remember: Form 941 is a quarterly return, but deposits may be 

required on a monthly or semiweekly schedule. 

3-14
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 3

 

 

 Green for Ever, Inc. 

Exercises 

Exercise 1 

EIN: 10-1234567 

925 Fern Ave. 

Augusta, GA 32599 

Totals 26,830 1,663.46 389.04 1,972.00

*Employer must match these amounts. 

6/14/02 3 4,405 273.11 63.87 467.00

5/31/02 4 5,050 313.10 73.23 328.00

5/17/02 4 5,975 370.45 86.64 373.00

5/3/02 4 5,545 343.79 80.40 4356.00

4/19/02 3 3,805 235.91 55.17 285.00

4/5/02 2 $2,050 $127.10 $29.73 $163.00 

Pay Number Gross *Social *Medicare Income

Date of Wages Security Tax Tax 

 Employees Tax Withheld Withheld Withheld

First, figure the amount and date of deposits (the company is a 

monthly depositor). Then complete a Form 941 (Exhibit 3.8) using

the information provided.

Deposit dates and amounts are: 

_________________________ 

_________________________ 

_________________________ 

Total deposits $____________ 

(Answers are found on pages A-2 and A-3.)

3-15
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 3

 

EXHIBIT 3.8 - BLANK FORM 941, EMPLOYER’S QUARTERLY FEDERAL TAX RETURN FOR EXERCISE 1 

3-16
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 3

 

Exercise 2 In May 2002, you decide to employ your 16 year-old son* to assist 

you in your yard service business, Glenn’s Landscaping (a sole 

proprietorship). You are advised to have him complete a Form W4, which he does, showing no (0) withholding allowances and 

single filing status. It is agreed that he will earn $5.00 per hour and 

be paid every two weeks. He had worked 36 hours when it came 

time to make out his first paycheck. Using Publication 15 as a

reference, answer the following:

How much should you withhold from his check?

*Social Security Tax $__________ 

Medicare Tax $__________ 

Federal Income Tax $__________ 

*See page 28 (Family Employees) of Publication 15. 

(Answers are found on page A-2.)

 Exercise 3 Paul’s Auto Shop, Inc. 

EIN 10-9876543 

425 Auto Strip Dr. 

Cando, LA 88877 

Pay Number Gross *Social *Medicare Income Tax AEIC

Date of Wages Security Tax Withheld Payments 

 Employees Tax Withheld Withheld Before AEIC

10/4/02 20 $30,025 $1,861.55 $435.36 $5,980.00 $45.00

10/18/02 20 29,826 1,849.12 432.48 5,726.00 36.00

11/1/02 18 27,500 1,705.00 398.75 5,335.00 28.00

11/15/02 18 28,845 1,788.39 418.25 5,576.00 14.00

11/29/02 20 26,214 1,625.27 380.10 5,433.00 20.00

12/13/02 20 30,025 1,861.55 435.36 5,980.00 45.00

12/27/02 20 30,025 1,861.55 435.36 5,980.00 45.00

Totals $206,460 $12,800.43 $2,993.66 $40,165.00 $236.00

12/27/02 (Bonus) 20 4,000 248.00 58.00 155.00 3.00

*Employer must match these amounts.

3-17
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 3

 

First, figure the amount and date of deposits (the corporation is a 

semiweekly depositor). Then complete a Form 941 and a Schedule 

B (Exhibit 3.9), using the information provided. 

Deposit dates and amounts are: 

_________________________ 

_________________________ 

_________________________ 

_________________________ 

_________________________ 

_________________________ 

_________________________ 

_________________________ 

Total deposits $____________ 

(Answers are found on pages A-2 and A-4.)

3-18
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 3

 

EXHIBIT 3.9 - BLANK FORM 941, EMPLOYER’S QUARTERLY FEDERAL TAX RETURN FOR EXERCISE 3 

3-19
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 3

 

EXHIBIT 3.9 - BLANK SCHEDULE B, FORM 941, EMPLOYER’S RECORD OF FEDERAL TAX LIABILITY 

FOR EXERCISE 3 

 

 

 

3-20
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 3

 

Lesson 3 

Part II: Form 940, Employer’s 

Annual Federal Unemployment 

(FUTA) Tax Return

Introduction The Federal Unemployment Tax Act (FUTA) provides for states 

and the federal government to cooperate in establishing and 

administering the unemployment tax program. The program 

provides for payments of unemployment compensation to workers 

who have lost their jobs. 

The various states create the actual employment insurance systems. 

The federal government approves the state laws and pays the 

administrative costs of the state programs. 

Under this dual system, the employer is first subject to a tax levied

by the state. This tax then becomes a credit against a separate

federal tax. However, you may be exempt from state tax but still 

have to pay the federal tax.

The federal unemployment (FUTA) tax is reported on Form 940, 

EMPLOYER’S ANNUAL FEDERAL UNEMPLOYMENT (FUTA) TAX RETURN 

or Form 940-EZ, EMPLOYER’S ANNUAL FEDERAL UNEMPLOYMENT 

(FUTA) TAX RETURN. Both forms cover one calendar year and are 

generally due by January 31 of the following year. (See Exhibits 

3.10 and 3.11 on pages 3-26 through 3-31.) 

 Objectives At the end of this lesson, you will be able to: 

1. Define employer, employee and wages subject to FUTA. 

2. Figure the FUTA tax due. 

3. Figure the deposits for FUTA taxes. 

4. Complete Form 940-EZ. 

References Publication 15, EMPLOYER’S TAX GUIDE (Circular E) 

Publication 15-A, EMPLOYER’S SUPPLEMENTAL TAX GUIDE

3-21
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 3

 

In general, you are an employer for FUTA tax purposes and must 

file and pay FUTA tax if, during the current or preceding year, 

you: 

Who Are 

Employers? 

• paid wages of $1,500 or more in any calendar quarter 

 to employees (other than farm workers or household 

 workers) or

• had one or more employees (other than farm workers 

 or household workers) at any time in each of any 20 or 

 more weeks (calendar).

The 20 weeks do not have to be consecutive. Count all regular, 

temporary and part-time employees, and count employees on 

vacation or sick leave. 

You may be liable for the state unemployment tax and not liable

for the FUTA tax. Conversely, you may be exempt from state tax

and still have to pay the federal tax. The definition of employer

under state laws may differ from the definition under federal law. 

Note: The term “employer” as used here refers to a person who 

is an employer for FUTA tax purposes only. It is possible 

not to be an employer for FUTA tax purposes and still be

an employer for social security and Medicare tax 

purposes or for purposes of withholding income tax. 

Who Are 

Employees? 

The rules used of social security and Medicare tax also apply in

determining who are common-law employees FUTA tax.

For FUTA tax, as for social security and Medicare taxes, there are 

statutory employees and non-employees in addition to commonlaw employees. 

Refer to the charts of special classes of employment in Publication 

15 to see which employees are covered by, or are exempt from, 

FUTA tax.

 What Are 

 FUTA 

 Wages? 

As with wages for income tax withholding and social security and 

Medicare tax, FUTA wages generally include money and other 

forms of payment to employees. For other exceptions, refer to 

Publication 15 or Publication 15-A. 

3-22
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 3

 

Wages Not 

Paid In 

Money

If you pay your employees in some medium that is neither cash nor 

a readily negotiable instrument (such as a check), you are said to

pay them “in kind.” Payments in kind may be in the form of goods, 

lodging, food, clothing or services. Generally, wages paid in kind 

are treated the same way as wages paid in money. The value of a 

wage payment in kind is its fair market price on the day the 

payment is made. 

Generally, if you pay an employee’s liability for social security

and Medicare taxes without deducting the tax from the employee’s 

pay, you must include the amount of the payment in the 

employee’s wages the FUTA tax. 

Employee 

Taxes Paid 

by Employer 

Figuring 

FUTA Tax

The FUTA tax is figured on the first $7,000 in wages paid to each 

employee during the year. The tax is imposed on you as the 

employer. You must not collect it or deduct it from the wages you 

pay your employees. 

The current FUTA tax rate is 6.2%. Generally, you can take a 

credit against your FUTA tax for amounts you paid into state 

unemployment funds. This credit cannot be more than 5.4% of 

taxable FUTA wages. If you are entitled to the maximum 5.4% 

credit, the FUTA tax rate after the credit is 0.8%. 

Example In November 2001, you hired Alice Green, and paid her $3,500 in 

wages before the year ended. All $3,500 was subject to the FUTA

tax. The first $7,000 you pay her in 2002 is also subject to the tax.

Alice’s total wages for 2002 reached $7,000 in mid-March. None 

of the wages you pay her for the remainder of the year are subject 

to the FUTA tax.

In July, Alice quits her job, and you hire someone to replace her. 

The first $7,000 you pay Alice’s replacement in 2002 is also 

subject to the FUTA tax.

Credit for 

Contributions

to States 

Contributions are payments that a state requires an employer to

make to its unemployment fund for the payment of unemployment 

benefits. However, contributions do not include: 

▪ Any payments deducted or deductible from your employees’

pay.

▪ Penalties, interest or special administrative taxes not included 

in the contribution rate the state assigned to you. 

3-23
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 3

 

▪ Voluntary contributions paid to get a lower assigned rate. 

You may receive an additional credit if you have a state experience

rate lower than 5.4% (.054). This applies even if your rate changes 

during the year. This additional credit is equal to the difference

between actual payments and the amount you would have been 

required to pay at 5.4%. 

The total credit allowable may not be more than 5.4% of taxable

FUTA wages.

Note: Credit for state contributions you make after the due date 

 for filing Form 940 may not be more than 90% of the 

 amount that would have been allowable if you had paid the 

 amounts by the due date. 

State 

Experience 

Rate

Your state experience rate is the rate at which the state taxes your 

payroll for state unemployment purposes. This rate may be 

adjusted from time to time based on the number and length of

claims for unemployment compensation that your former

employees make against the fund. If you do not know your rate, 

contact your state employment security agency. 

If you have been granted an experience rate lower than the 

maximum credit of 5.4% by a state for all or part of the year, you 

are still allowed the full credit. However, you cannot take credit for

any state taxes for which you are liable and do not pay.

Successor 

Employer

If you acquire substantially all the property used in the business (or 

a unit of the business) of a previous employer who was subject to 

this tax, you may count, for purposes of the $7,000 annual limit, 

the wages the previous employer paid during the year to the

employees who continue to work for you. 

If, at the end of any calendar quarter, you owe, but have not yet 

deposited, more than $100 in FUTA tax, you must make a deposit 

by the last day of the next month. If the accumulated tax at the end 

of any of the first three quarters is $100 or less, do not deposit the 

amount; instead, add it to the tax for the next quarter. 

Depositing 

the Tax

To figure your tax for each quarter, multiply .8% (.008) by the part 

of the first $7,000 of each employee’s annual FUTA tax wages that 

you paid during the quarter. 

3-24
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 3

 

When to Deposit Deposit the FUTA tax by the last day of the first month after the

quarter ends. 

If your liability for the fourth quarter (plus any amount not 

deposited from any earlier quarter) is over $100, deposit the entire 

amount by the due date (January 31) of Form 940 or Form 940-EZ. 

If it is $100 or less, you can either make a deposit or pay the tax

with your Form 940 or 940-EZ by January 31. 

How to Deposit If your FUTA tax liability for any calendar quarter in 2002 is more 

than $100 (including any FUTA tax carried forward from an earlier 

quarter), you must deposit the tax using EFTPS or in an authorized 

financial institution using Form 8109, FEDERAL TAX DEPOSI COUPON. 

Example Tim Tower has two employees. In each quarter of 2002, George is 

paid wages of $3,000 and Mark is paid wages of $2,000. Tim’s 

FUTA tax liability for each of the first and second quarters is $40 

($5,000 x .008). He is not required to deposit after the first or 

second quarter because his liability at the end of the second quarter 

is $80 (not more than $100). During the third quarter, Tim paid 

wages of $3,000 subject to FUTA tax. Only $1,000 of George’s 

wages is taxable because $6,000 was paid in the first two quarters. 

All of Mark’s wages are taxable because he has not reached the 

$7,000 level. Tim’s tax liability for the third quarter is $24 

($3,000 x .008). His liability through the third quarter is $104 ($40 

for each of the first and second quarters plus $24 for the third). He 

must deposit $104 by October 31, 2002. 

In the fourth quarter, none of George’s wages are subject to FUTA 

but $1,000 of Mark’s is taxable. Tim should pay $8. ($1,000 x

.008) with Form 940 or 940-EZ. 

 

3-25
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 3

 

EXHIBIT 3.10 – BLANK FORM 940, EMPLOYER’S ANNUAL FEDERAL UNEMPLOYMENT (FUTA) TAX 

3-26
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 3

 

EXHIBIT 3.10 – BLANK FORM 940, EMPLOYER’S ANNUAL FEDERAL UNEMPLOYMENT (FUTA) TAX

RETURN, PAGE 2 

3-27
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 3

 

EXHIBIT 3.11 – BLANK FORM 940-EZ, EMPLOYER’S ANNUAL FEDERAL UNEMPLOYMENT (FUTA)

TAX RETURN 

3-28
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 3

 

Forms 940 and 940-EZ Filing 

You can file Form 940-EZ instead of Form 940 if you: 

▪ paid unemployment taxes (“contributions”) to only one state, 

▪ paid all state unemployment taxes by January 31, 2003 

(February 11, if you deposited all FUTA tax when due) and 

▪ all wages that were taxable for FUTA tax purposes were also 

taxable for your state’s unemployment tax.

For example, if you paid wages to corporate officers (these wages 

are subject to FUTA tax) in a state that exempts these wages from

its unemployment taxes, you cannot use Form 940-EZ.

Form 940-EZ

You must complete lines A and B and Part I. If your FUTA tax

(line 6) is over $100, you must also complete Part II. Lines A and B

Line A.

Enter the amount of your state unemployment contributions. If you 

are lucky enough to have been given a state experience rate of 0%

enter “0% rate” in the space. 

Line B (1).

Enter the state where you pay unemployment contributions. 

Line B (2).

Enter your state reporting number.

Part I.

Taxable Wages 

And FUTA Tax 

Line 1. 

Enter the total payments made during the year for services of

employees. 

Line 2. 

Enter payments that are exempt for FUTA purposes, see 

Publication 15 (under Special Rules for Various Types of Services 

and Payments). Do not enter payments over $7,000 for each 

employee. 

Line 3. 

Enter the amount of taxable payments that were over the $7,000 

you paid each employee.

3-29
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 3

 

Line 6. 

Compute the FUTA tax by multiplying the wages on Line 5 by

.008. 

Line 7. 

FUTA tax deposited. 

Line 8. 

Balance due. 

Line 9. 

Overpayment.

Part II. 

Record of 

Quarterly 

FUTA Tax 

Liability

Complete this part only if your FUTA tax on line 6 is over $100. 

Your quarterly FUTA tax liability is figured by multiplying the

wages subject to FUTA tax within the $7,000 limit by .008. The 

total must match line 6 in part I.

Remember, this is your tax liability based on when you paid the 

wages and not on when the deposits were made. 

Sue Martin owner of Martin’s Fabric Shop has two employees, 

whom she paid each Friday. She meets all the filing requirements 

for Form 940-EZ. She made contributions of $352.00 to the state 

of Virginia and her state unemployment number is VA94371. 

Form 940-EZ has been completed using the following information 

(See Exhibit 3.12 on page 3-33): 

 

Example of

Completed 

Form 940-EZ

3-30
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 3

 

EXHIBIT 3.12 - FORM 940-EZ, SUE MARTIN EXAMPLE

3-31
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 3

 

EXHIBIT 3.13 – FORM 940, APPLIED FOR (DATE) EXAMPLE

Tips for 

Completing 

Forms 940 

or 940-EZ 

Always use a preaddressed form if available. This insures faster 

and more accurate processing. However, if your preaddressed form 

is not available, do not delay filing because you could be charged a 

late filing penalty. Using a current year form, enter your name, 

trade name, address, ZIP code and your EIN. If you have applied 

for an EIN, but have not received it, write “Applied for” and the 

date you applied in the space provided for the number (See Exhibit

3.13 above.) 

Summary In this lesson you learned who must pay FUTA tax, what wages 

are subject to this tax, how to figure the amount of FUTA tax due 

and when the tax must be deposited. You also learned how to 

complete Form 940-EZ. Important points to remember include: 

 • when Form 940 or 940-EZ is due, 

 • what the deposit requirements are and 

 • that only employers pay FUTA tax.

3-32
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 3

 

Exercises 

Exercise 1

Mr. Wilson opened a business in January 2002 and hired sixemployees. In the first quarter he paid the employees each week 

for 13 weeks. Use the following information to determine:

(A) How much of the total wages is subject to FUTA tax? $___ 

(B) What is the first quarter FUTA tax liability? $_________ 

(C) When is the deposit due date? ______________ 

 

Mr. Wilson’s Business

Employee Wages Paid in Quarter

R. Riding $ 4,500 

M. Lamb 8,100

J. Nimble 3,400

C. Moon 5,600 

C. Fiddle 4,900 

P. Son 5,200 

Total Wages $31,700

Assume that the same facts are true for the second quarter (that is, 

there are 13 paydays; each employee’s wages remain the same and 

no new employees are hired). Use the information in the previous 

table to determine:

(D) How much of the total wages is subject to FUTA tax?

$_____________ 

(E) What is the second quarter FUTA tax liability? $______ 

(F) Is a deposit due? ✎ YES. NO 

(G) When an employer pays state contributions after the due date

(or extended due date) of Form 940, the credit for the state 

contributions is ___% of the amount that would be allowed if the 

employer had paid the state contributions by the due date. 

(Answers are found on page A-6.)

3-33
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 3

 

Exercise 2 Complete Form 940-EZ for ACME Inc., using Exhibit 3.14 - 

BLANK FORM 940-EZ FOR EXERCISE 2 on page 3-37 and the 

following information: 

State reporting number: 12345 

State taxable payroll: $18,200 

Experience rate: 2.7% from January 1 to December 31, 2002. 

During 2002 and before the date of Form 940-EZ, ACME paid 

$491.40 to Michigan for unemployment tax.

ACME, Inc., 

EIN: 10-7654321 

123 First St. 

Cedar, MI 49621

A. When must ACME make deposit(s)? ___________ 

B. How much must be deposited? $_____________ 

C. How much must be paid with the return? $__________ 

(Answers are found on pages A-6 and A-7.)

 

3-34
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 3

 

EXHIBIT 3.14 - BLANK FORM 940-EZ FOR EXERCISE 2 

Notes 

3-35
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 4

 

Lesson 4 

Business Use of Your Home 

Introduction The purpose of this lesson is to provide information on figuring

and claiming the deduction for business use of your home. The 

term home can include a house, apartment, condominium, mobile 

home or boat. It also includes structures on the property, such as 

an unattached garage, studio, barn or greenhouse. 

1. Determine if you are eligible for the business use of the home Objectives deduction. 

2. Complete Form 8829, EXPENSES FOR THE BUSINESS USE OF 

 YOUR HOME. 

 

 

4-1
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 4

 

 To deduct expenses related to the business use of part of your

 home, you must meet specific requirements. Even then, the 

 deduction may be limited. To qualify to claim expenses for the

 business use of your home, you must meet the following tests: 

Qualifying for a 

Deduction 

 • your use of the business part of your home must be: 

• exclusive (see Exceptions to exclusive use, later), 

• regular and 

 • for your business, and

 • the business part of your home must be one of the following: 

 

 • your principal place of business, 

 • a place where you meet with patients, clients or customers 

in the normal course of your business, or 

 • a separate structure (not attached to your home) you 

 use in connection with your business. 

Exclusive Use To qualify under the exclusive use test, you must use a specific 

 area of your home only for your trade or business. The area

 used for business can be a room or other separately identifiable 

 space. The space does not need to be marked off by a permanent

 partition. 

 You do not meet the requirements of the exclusive use test if

 you use the area in question both for business and for personal 

 purposes. 

 

 Example: You are an attorney and use a den in your home to 

 write legal briefs and prepare client tax returns. Your family

 also uses the den for recreation. Since the den is not used 

 exclusively in your profession, you cannot claim a business 

 deduction for its use. 

 You do not have to meet the exclusive use test if: Exceptions to 

Exclusive Use • you use part of your home for the storage of inventory or 

product samples, or 

 • you use part of your home as a day-care facility.

Regular Use To qualify under the regular use test, you must use a specific area 

 of your home for business on a continuing basis. You do not meet 

4-2
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 4

 

 the test if your business use of the area is only occasional or 

 incidental, even if you do not use that area for any other purpose. 

You can have more than one business location, including your Principal Place 

of Business 

home, for a single trade or business. One way to qualify to deduct 

the expenses for the business use of your home is if your home is 

your principal place of business. To determine this, you must 

consider all of the facts and circumstances. 

Your home office will qualify as your principal place of business 

for deducting expenses for its use if: 

 • you use it exclusively and regularly for administrative or 

 management activities of your trade or business and 

 • you have no other fixed location where you conduct 

 substantial administrative or management activities of your

 trade or business. 

The following activities that are administrative or managerial in 

nature: 

• billing customers, 

• keeping books and records, 

 • ordering supplies, 

 • setting up appointments and 

• forwarding orders or writing reports. 

The following activities will not disqualify your home office as 

your principal place of business: 

 • employing others to conduct your administrative or 

management activities at locations other than your home,

 • conducting administrative or management activities at 

 places that are not fixed locations of your business, such 

as in a car or a hotel room, 

 • occasionally conducting minimal administrative or 

 management activities at a fixed location outside your home,

 • conducting substantial nonadministrative or nonmanagement 

 business activities at a fixed location outside your

home and

 • having suitable space to conduct administrative or management 

 activities outside your home, but choosing to use 

 your home office for those activities instead. 

Example A: Jon is a self-employed plumber. Most of Jon’s time is 

 

4-3
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 4

 

spent at customers’ homes and offices installing and repairing

plumbing. He has a small office in his home that he uses exclusively

and regularly for the administrative or management details of his 

business, such as phoning customers, ordering supplies and keeping

his books. Jon does not do his own billing. He uses a local 

bookkeeping service to bill his customers. 

Jon’s home office qualifies as his principal place of business for 

deducting expenses for its use. He uses the home office for the 

administrative or managerial activities of his plumbing business 

and he has no other fixed location where he conducts these 

administrative or managerial activities. His choice to have his 

billing done by another company does not disqualify his home 

office as his principal place of business. Because he meets all the 

qualifications, including principal place of business, he can deduct

expenses (to the extent of the deduction limit) for the business use 

of his home. 

Example B: Clyde is a self-employed anesthesiologist. He spends 

the majority of his time administering anesthesia and postoperative

care in three local hospitals. One of the hospitals provides him 

with a small-shared office where he could conduct administrative 

or management activities. Clyde does not use the office the hospital 

provides. He uses a room in his home, that he has converted, as an 

office. He uses this room exclusively and regularly to conduct all the 

following activities: 

 • contacting patients, surgeons and hospitals regarding

 scheduling,

 • preparing for treatments and presentations, 

 • maintaining billing records and patient logs, 

 • satisfying continuing medical education requirements and 

 • reading medical journals and books. 

Clyde’s home office qualifies as his principal place of business for 

deducting expenses for its use. He conducts administrative or 

management activities there for his business as an anesthesiologist. 

He has no other fixed location where he conducts administrative or 

management activities for this business. His choice to use his home

office instead of one provided by the hospital does not disqualify his 

home office as his principal place of business. His performance of

4-4
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 4

 

substantial nonadministrative or nonmanagement activities at fixed 

locations outside his home also does not disqualify his home office 

as his principal place of business. Because he meets all the 

qualifications, including principal place of business, he can deduct

expenses (to the extent of the deduction limit) for the business use of 

his home.

If you do not meet the principal place of business test, your home Meeting Place

for Customers

office may qualify if you meet or deal with patients, clients or 

customers in your home in the normal course of your business, 

even though you also carry on business at another location. You 

can deduct your expenses for the part of your home used exclusively

and regularly for business if:

 • you physically meet with patients, clients or customers at 

 your home and 

 • the use of your home is substantial and integral to the 

 conduct of your business. 

Using your home for occasional meetings and telephone calls will 

not qualify you to deduct expenses for the business use of your 

home. 

Separate 

Structure 

You can deduct expenses for a separate freestanding structure, 

such as a studio, garage, storage shed or barn, if you use it 

exclusively and regularly for your business. The structure does not 

have to be your principal place of business or a place where you 

meet patients, clients or customers. 

Most expenses related to the business use of your home are 

Business 

Percentage 

limited to the percentage of your home used for business (business 

percentage). 

To find the business percentage, compare the size of the part of 

your home that you use for business to your whole house. You 

can use any reasonable method to determine the business percentage. 

The following are two commonly used methods for figuring 

the percentage. 

Divide the area used for business by the total area of your home. 

Example: Your office is 240 square feet. Your home is 1200 

square feet. Your office is 20% (240/1200) of the total area of

your home. Your business percentage is 20%. 

Area Method 

 

4-5
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 4

 

Number-of-Rooms 

Method 

Divide the number of rooms used for business by the total number 

of rooms in your home. You can use this method if the rooms in 

your home are all about the same size. 

Example: Peggy has an art studio in her home. She is allowed to 

take a deduction for the business use of her home. The rooms in 

her house are all about the same size. There are ten rooms and she 

uses one for a studio. Her business-use percentage is 10%. 

Note: Use lines 1-7 of Form 8829, EXPENSES FOR BUSINESS 

USE OF YOUR HOME, to figure your business percentage. 

Types of 

Expenses 

There are two types of expenses related to using your home for 

business. 

 1. Expenses related to the business activity in the home but 

 not to the use of the home itself. 

 2. Expenses for the business use of the home. 

Expenses for the business use of the home are divided into three 

categories. 

1. Direct expenses 

2. Indirect expenses 

 3. Unrelated expenses 

Business expenses related to the business activity in the home Expenses Not 

Related to 

Business 

Use of the Home

but not to the use of the home itself are deductible in full on 

Schedule C (Form 1040) or Schedule F (Form 1040). These 

expenses are not limited to the business use of the home percentage 

or the deduction limit (discussed later). Examples of

some of these expenses include the following: 

• advertising,

• business taxes, 

• car and truck expenses,

• salaries,

• supplies and 

• travel. 

4-6
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 4

 

You must divide the expenses of operating your home between Expenses for

Business Use of 

Your Home 

personal and business use. The part of a home operating expense 

that you can use to figure your deduction depends on: 

• whether the expense is direct, indirect or unrelated and 

• the percentage of your home that is used for business. 

Direct Expenses Expenses only for the business part of your home are generally

deductible in full unless subject to the deduction limit, discussed 

later. 

Example: Painting or repairs only in the area used for business. 

Indirect

Expenses 

Expenses for running your entire home 

are deductible based on the percentage

of your home used for business. They

may also be subject to the deduction 

limit, discussed later. 

Examples: Insurance, utilities and 

general repairs. 

Unrelated

Expenses 

Expenses for the parts of your home not used for business are 

not deductible; (i.e. lawn care, painting a room not used for 

business). 

Example: Jeff is allowed to take a deduction for the business use 

of his home. He has the following expenses: 

 

 Landscaping $1,500 

 Painting the business office $700 

 Utilities for the entire house $1,060 

 

 Repairs to the roof of the house $500 

 Repairs to the business office $100 

 Painting the bedroom $400 

 

Painting the bedroom and landscaping are unrelated expenses. 

They cannot be deducted. The painting and repairs to the office 

are direct expenses and can be deducted in full. The repairs to 

the roof and utilities are indirect expenses. They are divided 

 

4-7
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 4

 

between business and personal parts of the house. The business 

part is deductible. 

Certain expenses are deductible whether or not you use your

Examples of

Expenses 

home for business. However, if you qualify to claim business use 

of the home expenses, you can use the business part of these 

expenses to figure your business use of the home deduction. 

These expenses are:

 • real estate taxes, 

 • deductible mortgage interest and 

• casualty losses. 

Other expenses are deductible only if you use your home for 

business. These expenses generally include (but are not limited 

to):

• insurance,

 • rent, 

 • repairs, 

• utilities and services and 

 • depreciation on your home. 

Real Estate Taxes: To figure the business part of your real estate 

taxes, multiply the real estate taxes paid by the percentage of your

home used for business.

Deductible Mortgage Interest: To figure the business part of 

your deductible mortgage interest, multiply this interest by the

percentage of your home used for business. 

Casualty Losses: If you have a casualty loss on your home that 

you use for business, treat the casualty loss as a direct expense, an 

indirect expense or an unrelated expense, depending on the 

property affected. If the loss is on a part of the property used for 

both business and personal purposes, use only the business portion 

to figure the deduction. 

Insurance: You can deduct the cost of insurance that covers the 

business part of your home. However, if your insurance premium 

gives you coverage for a period that extends past the end of your 

tax year, you can deduct only the business percentage of the part 

of the premium that gives you coverage for your tax year. 

Rent: If you rent, rather than own, a home and meet the 

requirements for business use of the home, you can deduct part of the 

rent you pay. To figure your deduction multiply your rent payments 

4-8
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 4

 

by the percentage of your home used for business.

Repairs: The cost of repairs and supplies that relate to your

business, including labor (other than your own labor), is a 

deductible expense. For example, a furnace repair benefits the entire

home. If you use 10% of your home for business, you can deduct 

10% of the cost of the furnace repair. 

Utilities and services: You may deduct the business portion of 

your utilities and services, such as gas, electricity, trash removal 

and cleaning services. Generally, the amount deductible is the 

business-use percentage multiplied by the utility expense.

The basic local telephone service charge, including taxes, for the 

first telephone line into your home is not deductible. However, 

charges for business long-distance phone calls on that line, as well 

as, the cost of a second line into your home used exclusively for 

business, are deductible business expenses. Deduct these charges 

on either Schedule C (Form 1040) or Schedule F (Form 1040). 

They are not part of your home office deduction. 

Depreciation: Some expenses cannot be deducted all at once. 

The cost of any business property that lasts for more than one 

year must generally be deducted over a number of years. The 

annual expense is called depreciation. Depreciation reflects the 

reduction in value of the property.

To calculate depreciation on the business part of your home, you 

need to determine the depreciable basis of your home. Generally

the depreciable basis of your home will be the lesser of: 

 1. the fair market value of your home (excluding land) on the 

 date you first use it for business or 

 2. the purchase price (excluding land) plus any major 

 improvements you made and minus any casualty losses or 

 other changes to basis. 

 To determine how much of the depreciable basis you can use 

 to compute your depreciation deduction, multiply the 

 depreciable basis by the business-use percentage. 

Example: Barry owns an accounting service. He uses 10% of his 

home as a business office. When Barry started his business, his 

home was worth $60,000. The home cost $50,000 and the land 

$10,000. The depreciable basis of the home is $50,000. The 

depreciable basis of the business part of the home is $5,000 

($50,000 depreciable basis multiplied by 10% business-use 

 

4-9
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 4

 

percentage). 

For information on how to calculate depreciation, see INSTRUCTIONS 

TO FORM 8829 or IRS Publication 946, HOW TO DEPRECIATE 

PROPERTY.

Example: The following example shows how to compute the 

business percentage of the various expenses using Form 8829, 

EXPENSES FOR BUSINESS USE OF YOUR HOME. 

Renee operates a private detective agency in her home. She is

allowed to take a deduction for expenses related to the business 

use of the home. Renee’s business-use percentage is 20 percent. 

She has the following expenses: 

 Real estate taxes $1000 

 Dues $50 

 

 Repairs to the floor of the office $200 

 Utilities $800 

 Transportation expenses $150 

 Insurance premiums on entire house $600 

 Mortgage Interest $700 

 Depreciation on entire house $700 

 Advertising $100 

 

 Painting the office $400 

 

 Business cards $50 

 Roof repair $100 

Exhibit 4.1 on page 4-11 shows lines 9-30, Form 8829, EXPENSES 

FOR BUSINESS USE OF YOUR HOME, for Renee. Dues, transportation, 

advertising and business cards are expenses related to the 

business activity in the home but not to the business use of the 

home itself.

4-10
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 4

 

EXHIBIT 4.1 - EXPENSES RELATED TO BUSINESS USE OF THE HOME, FOR RENEE EXAMPLE

 

4-11
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 4

 

If your gross income from the business operated or managed from 

Deduction 

Limit

your home equals or exceeds your total business expenses, you can 

deduct all your business expenses. If your gross income from that

use is less than your total business expenses, your deduction for 

certain expenses for the business use of your home is limited. 

Gross income is generally the total sales of your business less cost 

of goods sold. 

Your deduction of otherwise nondeductible expenses, such as 

insurance, utilities and depreciation (with depreciation taken last),

is limited to the gross income from the business use of your home 

minus the sum of the following: 

• The business part of expenses you could deduct even if you did 

 not use your home for business (such as mortgage interest, real 

 estate taxes and casualty and theft losses). 

• The business expenses that relate to the business activity in the

 home (for example, salaries or supplies), but not to the use of 

 the home itself. 

Example: Your deduction limit is $500. Your otherwise 

nondeductible expenses related to the business use of the home are 

$800. The deduction for these expenses is limited to $500. 

Expenses that cannot be deducted because of the deduction limit 

Carryfo can be carried forward to later years, subject to the deduction rward 

limit in those years. 

Example: Computing the deduction and carryforward. 

Renee has gross income of $1,500.00 from her private detective 

agency. She has $350 in business expenses that do not relate to 

the business use of the home. Her tentative profit is $1,150 

($1,500-$350). Using figures from Exhibit 4.1, the business 

portion of her expenses are: 

 Mortgage interest ($700 x 20%) $140 

 Real estate taxes ($1,000) x 20%) 200 

 Direct expenses 600 

 Other indirect expenses 300 

 Depreciation 140 

Renee can take a deduction of $1,150 for expenses related to the 

business use of the home. The remaining $230 (including all of 

the depreciation of $140) is not deductible but can be carried 

4-12
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 4

 

forward. (See Exhibit 4.2 on page 4-13.) 

EXHIBIT 4.2 – EXPENSES Not RELATED TO BUSINESS USE OF THE HOME, FOR RENEE EXAMPLE

 

4-13
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 4

 

Where to De duct Expenses Related to 

the Business Use of the Home

Self-employed individuals show their business income and expenses 

on Schedule C (Form 1040), PROFIT OR LOSS FROM BUSINESS, 

or on Schedule F (Form 1040), PROFIT OR LOSS FROM FARMING. 

If you file Schedule C, expenses related to the business use 

of the home are figured on Form 8829, EXPENSES FOR BUSINESS 

USE OF YOUR HOME and you report the deductible amount on 

line 30 of Schedule C. If you file Schedule F, figure your deduction 

using the worksheet at the end of Publication 587, BUSINESS 

USE OF YOUR HOME, and report the deductible amount on line 34 

of Schedule F. Write “Business Use of Home” on the dotted line

beside the entry.

Caution: Do not take a double deduction for real estate taxes 

 and mortgage interest. If you report an amount for the 

 business portion of the taxes and interest on Schedule 

 C (or Schedule F), make sure you report only the 

 personal portion on Schedule A, ITEMIZED DEDUCTIONS. 

 The amounts reported on Schedule C (or F) and 

 Schedule A should be the total interest and taxes you 

 paid for the year. 

Note: Employees must itemize deductions on Schedule A (Form 

1040) in order to claim the deduction for business use of 

their 

home. See Publication 587 for more information. 

Sale or Exchange of Your Home 

If you sell or exchange your home, you may be able to exclude up 

to $250,000 (500,000 for certain married persons filing a joint 

return) of the capital gain on the sale. However, you cannot 

exclude any part of your gain that is equal to any depreciation 

allowed or allowable for the business use of your home after May

6, 1997. For more information on the sale or exchange of a home, 

see Publication 523, SELLING YOUR HOME. 

If you used any part of your home for business, you must adjust Depreciation the basis of your home for any depreciation that was allowable for 

its business use, even if you did not claim it. 

4-14
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 4

 

You must keep records that provide the information needed to

Recordkeeping figure your deductions for the business use of your home. You 

should keep all canceled checks, receipts, invoices and other 

evidence of expenses you paid. 

Your records must show the following information: 

 • The part of your home you use for business.

 

 • That you use the part of the home exclusively and regularly

 for business and it is one of the following: 

 • your principal place of business or 

 • a place where you meet patients, clients or customers in

 the ordinary course of your business or 

 • a separate structure.

 • The depreciation and expenses for the business part of 

 your home. 

Exercise In 2001, Frank started a tax preparation business in his home. He 

meets the qualifications to deduct business use of his home. His 

house is 2,800 square feet and his office space is 280 square feet. 

He has the following expenses: 

 Mortgage interest $10,000 

 Advertising $200 

 Real estate taxes $2,500 

 Home owners insurance $500 

 Office supplies $600 

 Utilities $2,200 

 Paint (for office only) $200 

 General repairs (for home) $2,000 

The fair market value of the house, which is less than the cost, is 

$250,000, and the value of the land is $40,000. The depreciation 

percentage is 2.461. His tentative profit on Schedule C is 

$30,000. 

Compute the business use of home deduction for Frank using

Form 8829, EXPENSES FOR BUSINESS USE OF YOUR HOME. 

(See Exhibit 4.3 on page 4-16.) 

(Answer on page A-7, Exhibit 4.4 - Filled-in Form 8829.)

 

4-15
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 4

 

EXHIBIT 4.3 - BLANK FORM 8829 FOR EXERCISE 

 

4-16
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 5

Lesson 5

 

Electronic Filing and Paying 

Of Business Taxes

Introduction If you were one of the more than 46 million taxpayers who filed 

their personal income tax return using IRS e-file in 2002 then 

you’re already aware of the countless benefits electronic filing

provides. Now business taxpayers and tax preparers can file by

phone, by Internet or by PC software. It’s more E-conomical with 

less paperwork. It’s more E-fficient with increased accuracy. And 

it’s more E-ffective since you’ll spend less time filing tax returns 

and more time focused on your business. If you’re a business 

taxpayer, ask your tax preparer about e-filing. If you’re a tax

professional, ask your software developer about enabling your 

programs to take advantage of electronic filing. 

This section of the workshop provides an overview of the 

programs available and a preview of those being developed. You 

can also obtain additional information online including a listing of

Approved IRS e-file for Business Providers and Partners – just log

on to www.irs.gov and click on the e-file logo. 

 Objectives At the end of this lesson, you will be able to: 

1. Name the IRS e-file for Business programs. 

2. Name the benefits of IRS e-file for Business 

programs. 

3. Name the Electronic Payment Options. 

4. Determine which programs you can use in your 

 business 

References Publication 15, Circular E, Employer’s Tax Guide 

Revenue Procedure 99-39, Procedures for the 

Electronic Filing of Form 941 (contained in Internal 

Revenue Bulletin 1999-43, dated October 25, 1999), 

and 

5-1
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 5

 

Publication 1855 Technical Specifications Guide for the 

Electronic Filing of Form 941, Employer’s Quarterly

Federal Tax Return (941e-file) 

Revenue Procedure 2001-9 (released January 16, 2001 

as part of Internal Revenue Bulletin 2001-3), and,

Publication 3715 Technical Specifications Guide for the 

Electronic Filing of Form 940, Employer’s Annual

Federal Unemployment (FUTA) Tax Return 

The IRS electronic employment tax filing program offers business 

taxpayers a variety of paperless options for filing Form 940 and

Form 941. Using this program, business taxpayers, reporting

agents, software developers and transmitters can file Form 940, 

Employer’s Annual Federal Unemployment (FUTA) Tax Return, 

and Form 941, Employer’s Quarterly Federal Tax Return, 

electronically. The program conducts security checks, sends 

electronic acknowledgments and builds records to be processed by

IRS computer systems. Returns are transmitted nationwide via

dial-up phone lines and menu driven software directly to the IRS 

where they are processed at the Tennessee Computing Center 

(TCC)/Memphis Submission Processing Center (MSPC). 

940 and 941e-file

The 941e-file Program accepts all current quarter tax returns, and 

returns for four preceding quarters, with the following exceptions: 

Amended Returns 

Returns with attachments other than Schedule B, 

(record of federal tax liability). 

941efile and 940e-file returns are signed with a Personal

Identification Number (PIN), which is assigned to the Reporting

Agent when an application is approved. 



A Form 941 filed through the 941e-file Program has the same due

date as a Form 941 filed on paper with due dates as follows: 

Quarter Ending Normal Due Date Extended Due Date

March 31st April 30th May 10th

June 30th July 31st August 10th

September 30th October 31st November 10th

December 31st January 31st February 10th

5-2
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 5

Form 940e-file returns are annual returns with a calendar year 

ending and have the same due date as a Form 940 filed on paper – 

January 31, 2002. If all taxes have been paid in full, the return due 

date is extended by ten days (February 10, 2002). 

Note: The extended due dates shown above apply to returns for 

which all taxes have been paid in full by the normal due

date. 

Who Can Participate in the 940 and 941e-file Programs? 

Business taxpayers using payroll service providers (Reporting

Agents) can electronically file Form 941, Employer’s Quarterly 

Federal Tax Return and Form 940, Employer’s Federal 

Unemployment (FUTA) Tax Return if their service provider offers 

these services. The payroll service provider electronically

transmits your Form 940 and/or 941 return directly to the IRS and 

beginning in January, 2003, these returns will be processed at the 

Cincinnati Submission Processing Center (CSPC). 

Note: In response to customer feedback, the IRS is redesigning the 

electronic tax filing system for “Employment Taxes”, using

a new XML (Extensible Markup Language) file format 

with expected release in 2003. The new system, referred to 

as the “Employment Tax e-file System” will address user 

needs by providing a more flexible system and enhanced 

features, including participation by Electronic Return 

Originators (EROs). An ERO is a tax professional who has 

been approved by the IRS to file returns electronically. 

If you’re a business taxpayer, you’ll want to ask your tax preparer

about the new Employment Tax e-file System. If you’re a tax

professional, ask your software developer/provider about enabling

your tax software program to take advantage of e-file for Business. 

 

What are the Benefits of 940 and 941e-file? 

It’s Convenient

It’s Paperless! Your PIN serves as your signature.

Electronic Acknowledgment within 48 hours 

Tax preparation work is automated with return preparation 

software that performs calculations, and highlights needed 

forms and schedules 

5-3
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 5

 

Fast

Information is quickly available to IRS Customer Service 

sites 

Processing time is reduced to one week or less 

Accurate

Fewer risks of transcription errors 

Error rates are less than one percent!

Safe

Tax Information is Secure

Only authorized users have access to the system

How to Participate Interested participants should have their Reporting Agent submit a

completed Form 9041, Application/Registration for 

Electronic/Magnetic Media Filing of Business Returns, or a Letter 

of Application (LOA) to the following address: 

Internal Revenue Service 

AUSPC, Electronic Filing Help Desk 

Attention: e-file Unit, Stop 6380 AUSPC

P.O. Box 1231 

Austin, TX 78767 

Form 9041, or Letter of Application (LOA) for 941e-file must be 

received by the following dates to be eligible to file a return for the 

quarter shown: 

Application Due Date For Quarter Ending

December 15th March 31st

March 15th June 30th

June 15th September 30th

Septemb r 15th December 31st e

Application for Form 

940e-file

Form 9041 or the Letter of Application (LOA) for 940e-file must 

be received by October 15th of the year for which the annual FUTA 

return is due. 

Upon IRS approval of the application, a Personal Identification 

Number (PIN), User-ID/Password/Access Code to access the 

Electronic Filing System is issued to the participant. 

Visit the Approved IRS e-file for Business Providers page as 

well as the IRS e-file for Business Partners page for a listing of

companies that offer IRS e-file for Business products and services. 

How can I get

more information?

Tip: Bookmark these pages as they are updated frequently 

 as new providers and partners are added, and new 

 products and services become available. 

5-4
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 5

940/941 OnLine Filing 

The IRS On-Line Filing Program for Form 941 and Form 940 is 

available to business filers. The On-Line program, which is a

Web-based Internet system, allows business filers to prepare, sign

and file Form 941, Employer's Quarterly Federal Tax Return and 

Form 940, Employer’s Annual Federal Unemployment (FUTA)

Tax Return, using an Approved IRS e-file for Business Provider 

also known as a third-party transmitter. Business taxpayers enter 

their information online by logging on to the approved provider’s 

Web site. The approved provider then transmits the return to the

IRS. 

Who can participate in the 940 and 941On-Line Filing Program? 

Business Filers 

Approved IRS e-file for Business Providers also known as 

third-party transmitters, or software developers 

What are the 

Benefits? 

It’s Convenient

It’s Paperless! Your PIN serves as your signature

Electronic Acknowledgment within 48 hours 

Tax preparation work is automated with return preparation 

software that performs the calculations, and highlights 

needed forms and schedules 

Fast

Information is quickly available to IRS Customer Service 

sites 

Processing time is reduced to one week or less 

Accurate

Fewer risks of transcription errors 

Error rates are less than one percent!

Safe

Tax Information is Secure

Only authorized users have access to the system

How to 

Participate 

Business Filers: Apply for a Personal Identification Number

(PIN) by completing the electronic Letter of Application (LOA)

online via the Web, to register through the “Approved IRS e-file

for Business Provider”(third-party transmitter) of their choice. The 

third-party transmitter will electronically transmit the LOA to the

Austin Submission Processing Center (AUSPC). Upon IRS 

approval of the business filers’ electronic LOA, the IRS mails a

Personal Identification Number (PIN) to the business filer within 3 

to 5 business days. The business filer uses the PIN to sign their 

electronic return online. The same PIN is used to sign Forms 940 

and 941. 

5-5
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 5

 

Transmitters/Software Developers Only: Submit a paper Form

9041, Application/Registration for Filing Business Returns or a 

paper Letter of Application (LOA) to the Austin Electronic Filing

Help Desk to participate in the 941 and/or 940 On-Line Filing

Program. Upon IRS approval of the participant’s application, the 

IRS will issue a User-ID/Password/Access Code to access the

Electronic Filing System, as applicable. 

Help is just a click away at www.irs.gov - click on the e-file logo. 

Remember to visit the Approved IRS e-file for Business 

Providers page as well as the IRS e-file for Business Partners

page for a listing of companies that offer IRS e-file for Business 

products and services. 

How can I get

more 

information? 

If you still have questions, you may contact the following IRS efile Help Desks for assistance. For questions on Form 9041, 

Application/Registration for Electronic /Magnetic Media Filing of

Business Returns or Letter of Application (LOA) contact: 

Internal Revenue Service 

Austin Submission Processing Center 

Electronic Filing Help Desk

PO Box 1231 

Austin, TX 78767 

Attn: e-file Unit, Stop 6380 AUSPC

Telephone: (512) 460-8900 (not toll-free) 

 Beginning in January 2003, for questions on the 941 e-file Program 

 Contact: 

 Internal Revenue Service 

 Cincinnati Submission Processing Center

 Cincinnati Electronic Filing Help Desk

 201 W. Rivercenter Blvd

 Covington, KY 41012 

 Attn: e-file Unit, Stop 2711 CSPC

 Telephone 

5-6
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 5

941TeleFile 941TeleFile is an electronic IRS e-file option for eligible

businesses that choose to electronically file Form 941, Employer’s 

Quarterly Federal Tax Return, using a Touch-Tone telephone. It

is an interactive computer program that calculates the qualified 

caller’s tax liability or any overpayment and begins the electronic

filing process over the phone. This program is paperless (no forms 

are required to be mailed) and it’s FREE. 

941TeleFile users can elect to electronically file and 

simultaneously pay any balance due on the return by using

Electronic Funds Withdrawal, formerly known as Direct Debit 

(automatic withdrawal). 

Businesses that receive the special 941TeleFile Tax Record and 

Instructions as part of their Form 941 Tax Package must meet the 

qualifications in the instructions. 

Who can participate

in 941TeleFile? 

Your Can use 941 TeleFile if you: 

Receive the special TeleFile Tax Record as part of your 941 

package; 

Are a monthly schedule depositor for the entire quarter; 

Have not changed your business name, address or Employer 

Identification Number (EIN) during the previous quarter; 

Must have a break-even, overpayment (to be applied to the 

next quarter), or balance due return (using electronic funds 

withdrawal);

Are not a seasonal employer; 

Have no schedules or attachments (if you are required to file

a Schedule B you are not eligible to use 941TeleFile); 

Only have fractions of cents adjustments; and 

Choose to claim Advance Earned Income Credit (AEIC)

payments. (Optional) 

5-7
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 5

 

NEW ! 

Beginning April 1, 2002, there’s an even faster and easier way to file Form 941. 

Certain business taxpayers are eligible to file the new 941TeleFile “Zero Wage Return”. You 

must have no employees, no withholding, no deposits and no taxes to report to be eligible. 

What are the 

Benefits of 

941TeleFile? 

It's Convenient - 941TeleFile is easy to use and provides 

step-by-step instructions over the phone. The 941TeleFile

Tax Record is an official record of your tax return. You also 

receive proof of filing - when you have finished the call and 

the IRS has accepted your return, the 941TeleFile system

provides you with a confirmation number. You can even 

choose to electronically pay any balance due by authorizing

an Electronic Funds Withdrawal from your bank account. 

It’s Fast – Information is quickly available to IRS Customer 

Service sites and processing time is greatly reduced. 

It’s Accurate – It does the math - 941TeleFile computes 

your tax liability and any overpayment or balance due during

the call. All entries are repeated to double-check accuracy.

It’s Safe – Tax information is secure. Only authorized users 

have access to the system.

How to 

Participate 

Businesses that receive the special tax package must complete the 

941TeleFile Tax Record before using a touch-tone telephone to 

place their call using the special toll-free number listed in the 

941TeleFile tax package. The interactive program prompts users 

to make the necessary entries from the TeleFile Tax Record, using

the telephone keypad. The system repeats each entry to verify

accuracy and to allow users to immediately correct any mistakes. 

Next, the system provides the overpayment or balance due amount 

to be entered on the TeleFile Tax Record that should be retained by

the filer. The system then plays a jurat statement and asks the 

caller to enter his or her identification information, which 

constitutes the electronic signature. (Refer to 941TeleFile

Instructions) The electronic signature should be for the authorized 

signer (member, officer or agent of the taxpayer), followed by the 

5-8
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 5

pound (#) sign. This alternative signature method makes the 

941TeleFile option completely paperless. 

Last, a ten-digit confirmation number is issued to the caller as

proof of filing. If the caller did not hear the confirmation number

or misplaces it, he/she may call the toll-free number again. The 

system will ask for the caller’s Employer Identification Number

(EIN). Once the EIN is entered, the ten-digit proof of filing

confirmation number is repeated. 

If the system will not accept the information being entered, 

determine if the correct telephone keypad buttons are being used to 

make entries. For instance, do not use the letter “O” for a number 

zero (0) or the letter “L” for number one (1). 

If an error is made but not realized until after hanging up, the caller 

must file a corrected paper return. 

Payment 

Options for 

941Tele-File

It's free and convenient - You can electronically file and pay all 

at once. 

 

It's safe and secure - Electronic Funds Withdrawal information 

will be used only for the tax payment you authorize. No other

withdrawals can legally be made. 

Bank account information is safeguarded with other tax

information. 

Payment information will not be disclosed for any reason other

than processing the transaction as authorized. 

The tax payment is included on the monthly bank statement, as 

a United States Treasury Tax Payment, as proof of payment. 

You will be prompted by the 941TeleFile script to enter bank 

account information. 

You must know the account number and financial institution's 

Routing Transit Number (RTN). 

You must identify the type of account from which the payment 

is to be made (checking or savings). 

Account numbers and Routing Transit Numbers can be found 

on checks and share drafts. 

5-9
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 5

 

Check with your financial institution if you have questions 

regarding these numbers and to confirm that the financial 

institution will allow an Electronic Funds Withdrawal from the 

account. 

 If you choose to pay using Electronic Funds Withdrawal 

You may authorize the U.S. Department of the Treasury

(through a Treasury Financial Agent) to transfer money from 

your bank account to the Treasury account. 

The payment date will be the same as the date the balance

due return is filed. 

Electronic Funds Withdrawal payments will be withdrawn 

in a single transaction, not installments. 

You can call the Treasury Financial Agent, toll-free at 1-

888-353-4537 to inquire about payments. Wait at least 5 

days after the return is filed before making inquiries. 

You will be notified if a payment is returned by the

financial institution due to insufficient funds, incorrect 

account information, closed accounts, etc. If this occurs, the 

IRS will send a notification letter to the address on the tax

return explaining why the payment could not be processed. 

The letter will include instructions for sending a check to a

unique address that has been established for this initiative. 

In the event the financial institution is unable to process the

direct debit transaction, you will be responsible for the tax

payment in addition to penalties and interest. 

Contact the IRS immediately at 1-800-829-1040 if there is 

an error in the amount withdrawn. 

In the event Treasury causes an incorrect amount of funds 

to be withdrawn from the bank account, Treasury is

responsible for returning any improperly transferred funds. 

1065 e-file for

Partnerships

Partnerships that engage in a trade or business or have gross 

income from sources within the United States may be able to 

electronically file Form 1065, U.S. Partnership Return of Income. 

5-10
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 5

Effective December 31, 2000, partnerships with more than 100 

partners are now required to file their Form 1065, Schedules K-1 

and related forms and schedules electronically. Failure to comply

with the provisions of the mandate could result in an assessment of 

a penalty.

Legislative 

Mandate

The electronic filing mandate applies only to those partnerships 

with more than one hundred partners, however businesses may

choose to voluntarily electronically file their Forms 1065 

regardless of the number of partners in the partnership. 

Certain partnership filers are excluded from the mandate as shown 

below. 

Form 1065-B Returns 

Form 1065 with a foreign address 

Amended Returns 

Returns filed under Sections 6020(b), 501(d)(3) or

761(a) of the Internal Revenue Code

Fiscal Year Partnership Returns 

Fiscal Year Short Period Returns 

Fiscal Year Final Returns 

Benefits of 1065 e-file

Less paper handling

Reduced costs 

Improved accuracy and product quality (fewer errors 

mean less correspondence with the IRS) 

Electronic acknowledgment of return 

A complete listing of Approved IRS e-file for Business Providers 

who offer 1065 e-file can be found at www.irs.gov - click on the 

e-file logo. Links to these companies’ Web sites are included. 

TIP: You may be able to enter your return information 

online via the Internet using software provided by the 

1065 e-file provider of your choice. The provider will 

then transmit your Form 1065 and K-1s to the IRS. 

Note: If you’ve chosen to use the services of an Approved IRS 

e-file for Business Provider to electronically file your

Form 1065, you do not need to submit an application. 

All others must submit Form 9041, Application/Registration for 

Electronic/Magnetic Media Filing of Business Returns, to the IRS 

Austin Submission Processing Center (AUSPC) in Austin, Texas 

for processing. The IRS accepts applications by mail or fax.

5-11
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 5

 

Internal Revenue Service 

Austin Submission Processing Center

ATTN: EFU, Stop 6380 

P.O. Box 1231 

+Austin, TX 78767

 Fax: (512) 460-8962 (not toll-free) 

 

Products In 1120/1120S e-file Program

Development Beginning January 2004, corporations will be able to electronically

file Form 1120, U.S. Corporation Income Tax Return and Form 

1120S, U.S. Income Tax Return for an S Corporation as well as 53 

associated forms and schedules. A Fed/State electronic filing

option is planned for 2005. 

With EFTPS, you can make your federal tax payments 

electronically instead of using paper deposit coupons. There are no 

more last minute trips to the bank, lost checks, inaccurate forms or 

postage costs. EFTPS is a free payment system sponsored by the 

U.S. Department of the Treasury. 

The EFTPS System 

• Currently serves more than 4 million business taxpayers

• Enrolls 6,500 new businesses each week 

• Is available to all business taxpayers

Note: Only businesses that make in excess of $200,000 in total 

yearly deposits are required to enroll in EFTPS, however it is 

available for use by all taxpayers. 

EFTPS offers you the convenience of making your federal tax 

payment directly by EFTPS-Phone (voice response system),

EFTPS-PC Software (personal computer), EFTPS-OnLine 

(Internet) or EFTPS-through a Financial Institution. You can 

initiate your tax payment 24 hours a day, 7 days a week. EFTPS 

even allows businesses to schedule their tax payment instructions 

up to 120 days in advance of the date you designate. No special 

equipment is required to use EFTPS; and, if you use a PC, free 

Windows®-based software is available. Whether you use a phone, 

PC, Internet or a service offered by a financial institution, you are 

in charge of initiating your tax payments through EFTPS. No one 

has unauthorized access to your account. You will also receive an 

Electronic Funds Transfer (EFT) Acknowledgment Number to 

keep as a record of your payment.

5-12
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 5

Pay Your Taxes

Electronically 

You can use EFTPS to pay these taxes: 

FORM 720 QUARTERLY FEDERAL EXCISE RETURN

FORM 940 EMPLOYER’S ANNUAL FEDERAL UNEMPLOYMENT TAX (FUTA)

RETURN

FORM 941 EMPLOYER’S QUARTERLY FEDERAL TAX RETURN

FORM 943 EMPLOYER’S ANNUAL TAX RETURN FOR AGRICULTURE WORKERS

FORM 945 ANNUALRETURN OF WITHHELD FEDERAL INCOME TAX 

FORM 990-C FARMER’S COOPERATIVE ASSOCIATION INCOME TAX RETURN

FORM 990-PF RETURN OF PRIVATE FOUNDATION 

FORM 990-T EXEMPT ORGANIZATION BUSINESS INCOME TAX 

RETURN SECTION 4947 (A)(1) CHARITABLE TRUST TREATED AS A PRIVATE 

FOUNDATION 

FORM 1041 FIDUCIARY INCOME TAX RETURN

FORM 1042 ANNUALWITHHOLDING TAX RETURN FOR U.S. SOURCES OF

INCOME OF FOREIGN PERSONSFORM 1120 U.S. CORPORATION INCOME TAX 

RETURN

FORM CT-1 EMPLOYER’S ANNUALRAILROAD RETIREMENT TAX RETURN

In addition, you can use EFTPS to make all your federal tax 

payments, including income, employment, estimated, excise and 

installment agreement payments. 

Payment 

Options 

On Form 9779, EFTPS BUSINESS ENROLLMENT FORM, you will be

asked to select from the following primary payment methods are: 

• EFTPS–Direct

• EFTPS–Through a Financial Institution 

You also have the option to use a Same Day Payment method, 

although many financial institutions charge significant fees for 

using this method. 

EFTPS–Direct

(Automated 

Clearinghouse 

(ACH) Debit)

If you select this method of payment, you will receive a Personal 

Identification Number (PIN). Your PIN must be used in 

combination with your Taxpayer Identification Number (TIN) to 

gain access to EFTPS. EFTPS will move the funds from your

account to the Treasury’s account on the date you designate. 

Funds will not move from your account until the date you 

indicate. 

Step 1. At least one calendar day before your tax due date, 

 and before 8:00 p.m. ET, you access EFTPS by 

 phone or PC. EFTPS will then prompt you for the 

 necessary information to complete your tax 

 payment report. 

Step 2. The system processes the information reported. 

5-13
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 5

 

 When the information is accepted, you will receive 

 an EFT Acknowledgment Number. Keep this 

 number for your records in case of questions at a 

 later date. 

Step 3. Once your tax payment report is accepted, EFTPS 

 will originate an ACH Debit transaction against 

 your designated account on the date you indicated 

when making your payment. 

Step 4. The funds will be transferred to the Treasury’s 

 account and the tax data will be reported to IRS to 

 update your tax records. 

EFTPS–Through a 

Financial

Institution (ACH

Credit)

In this method, you will instruct your financial institution to 

electronically move funds from your account to the Treasury’s 

Account. However, not all financial institutions offer this service. 

Therefore, before selecting this option, you should first check with 

your bank to see if they offer this service, how much it costs, and if 

you are eligible to use it.

Step 1. At least one day before the tax due date, you initiate 

 your payment through your financial institution. 

 The tax payment report must be made prior to your 

 financial institution’s ACH processing deadline.

Step 2. Your financial institution will originate an ACH 

 Credit transaction to EFTPS, transferring the funds 

 to the Treasury’s Account and the tax data to IRS 

 to update your tax records. 

Same Day 

Payment 

While EFTPS-Direct and EFTPS-Through a Financial 

Institution are the primary payment methods for EFTPS, you can 

also use the Same Day Payment method. Check with your 

financial institution for fees involved. Typically, the cost of Same 

Day Payments is higher than the other payment methods. 

Payroll Company If you choose to allow your payroll company to make tax

payments on your behalf, you should check with them for specific 

fees, deadlines and instructions pertaining to enrollment in EFTPS. 

If your payroll company is not making all of your tax 

payments through EFTPS, you will need to enroll in EFTPS to

initiate those payments not processed by them. It is also a good 

idea to enroll in EFTPS separately so that you have flexibility 

if you ever need to change payroll companies. 

Scheduling Feature As a bonus, if you are out of town when your tax payment is due, 

5-14
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 5

or you want to plan ahead, EFTPS offers a Payment Scheduling

feature. Businesses may schedule payment instructions up to 120 

days in advance of the tax due date; individuals may schedule 

payment instructions up to 365 days in advance of tax the due date 

and EFTPS will automatically make the payments on the due date 

indicated. 

New Banking 

Feature 

It is now easier for taxpayers to pay taxes electronically to change

their banking information. Taxpayers can now make changes to 

their financial institution information over the phone. Using

EFTPS-Phone, taxpayers call the 1-800 number for an automated 

way to add new financial institution account information. If the 

taxpayer elects not to have their financial information verified by

their bank, they will receive a new Personal Identification Number 

(PIN) immediately over the phone and can continue using EFTPS. 

If users choose to have their information verified, an additional 7-

10 days is required for processing, after which time taxpayers will 

receive a new PIN in the mail. EFTPS users can also use EFTPSOnLine to make changes and receive a new PIN within 7-10 days

by U.S. Mail. 

Customer 

Service and 

Enrollment 

Once you enroll in EFTPS, you will have dedicated Customer

Service Representatives to answer any questions about your 

payments. Customer Service Centers are open 24 hours a day, 7 

days a week. For more information or to enroll call 1-800-555-

4477 or 1-800-945-8400 or visit www.eftps.gov. 

After

Enrollment 

Once you have completed and mailed your enrollment form, 

EFTPS processes your enrollment and sends you a confirmation 

package, including a step-by-step Payment Instruction Booklet 

PIB). Your PIN will be sent under separate cover. Once you 

receive your PIN, you can begin making payments. 

IMPORTANT! If your Enrollment Form is incomplete and 

cannot be processed, you will receive notification from EFTPS 

regarding any missing information. 

References Publication 966, EFTPS – NOW A FULL RANGE OF ELECTRONIC

CHOICES TO PAY ALL YOUR FEDERAL TAXES 









Publication 3425- 5 Easy Ways to Use EFTPS, for Tax Practitioners, 

Accountants and Payroll Companies

Publication 3959, EFTPS CD-ROM for Taxpayers (Business and 

Individuals)

Form 9779, EFTPS BUSINESS ENROLLMENT FORM

5-15
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 5

 

5-16

Exhibit – Form 9779, Page 1 
SMALL BUSINESS TAX WORKSHOP – WORKBOOK LESSON 5

EXHIBIT - Form 9779, Page 2

5-17
SMALL BUSINESS TAX WORKSHOP – WORKBOOK ANSWERS

Answers 

Lesson 2

Exercise 1 1. Form SS-4, APPLICATION FOR EMPLOYER IDENTIFICATION 

 NUMBER. 

2. Form W-4. 

3. (A1) 6.2% social security tax rate and 

 

 (A2) 1.45% Medicare tax rate 

 (B) Same as above 

 (C) $84,900 wage base limit in 2002 for social 

 security tax

 (D) No wage base limit for Medicare tax

4. (A) Form W-2 

 

 (B) By January 31 of the following year 

5. Form 1099-MISC 

6. 30% 

7. Form W-5 

8. Forms W-2c and W-3c

 

 

A-1
SMALL BUSINESS TAX WORKSHOP – WORKBOOK ANSWERS

Lesson 3, Part 1 

 

Exercise 1 Deposit Date Amount

5/15/02 $1,343.82

6/17/02 2,491.56

 7/16/02 2,241.62

 Total $ 6,077.00

See filled-in Exhibit 3.8 page A-3. 

Exercise 2 Social Security Tax $ 0 

Medicare Tax 0 

Federal Income Tax $ 8 

Exercise 3

Deposit Date by Amount Monthly Amount

Wednesday 10/9/02 $10,528.82 

Wednesday 10/23/02 10,253.20 $20,782.02 

Wednesday 11/6/02 9,514.50 

Wednesday 11/20/02 9,975.28 $28,913.52 

Wednesday 12/4/02 9,423.74 

Wednesday 12/18/02 10,528.82 

Thursday 1/2/03 10,528.82 

Thursday 1/2/03 764.00 $21,821.64 

Total $71,517.18 $71,517.18 

See filled-in Exhibit 3.9 pages A-4 and A-5.

A-2 
SMALL BUSINESS TAX WORKSHOP – WORKBOOK ANSWERS

ANSWER TO EXERCISE 1 – EXHIBIT 3.8 

R. M. Green Jr. 

A-3
SMALL BUSINESS TAX WORKSHOP – WORKBOOK ANSWERS

ANSWER TO EXERCISE 3 – EXHIBIT 3.9 

(20)

Paul Patter

A-4 
SMALL BUSINESS TAX WORKSHOP – WORKBOOK ANSWERS

ANSWER TO EXERCISE 3 – EXHIBIT 3.9 

A-5
SMALL BUSINESS TAX WORKSHOP – WORKBOOK ANSWERS

Answers 

Lesson 3, Part 2 

 

Exercise 1 (A) $30,600 

(B) $244.80 

(C) 5/1/02 

(D) $11,200 

(E) $89.60 

 

 (F) No deposit required for under $100. 

(G) 90%

Exercise 2 (A) 7/31/02 

(B) $101.60 

(C) $44.00 

See filled-in Exhibit 3.14 page A-7. 

A-6 
SMALL BUSINESS TAX WORKSHOP – WORKBOOK ANSWERS

ANSWER TO EXERCISE 2 – EXHIBIT 3.14

 

A-7
SMALL BUSINESS TAX WORKSHOP – WORKBOOK ANSWERS

 

Answers 

Lesson 4 ANSWER TO EXERCISE – EXHIBIT 4.4

A-8