Taxes

While many cities collect income taxes that are separate from and in addition to state and federal taxes, New York City taxes are notoriously complicated and burdensome -- not only re-taxing corporate business profits, but also collecting taxes from otherwise untaxed entities like LLCs, partnerships, and sole proprietorships.

Unincorporated Business Tax

New York City collects an Unincorporated Business Tax on the business income of every unincorporated business (sole proprietorships, partnerships, and LLCs) carried on - wholly or partly - in New York City. If the business can demonstrate that a portion of its business was done outside New York City, that portion will not be subject to this tax. The rate is 4% of taxable income. You must file for and pay this tax if

• You have total gross income of more than $25,000 for a partnership or LLC with more than one member, or more than $75,000 for a sole proprietorship or single-member LLC, prior to any deduction for the cost of goods sold or services performed; or
• You have an unincorporated business taxable income of more than $15,000 for a partnership or LLC with more than one member, or more than $35,000 for a sole proprietorship or single-member LLC.

If your tax is $1,800 or less, a credit is issued for the entire amount of the tax and no tax will be due. If the tax is between $1,800 and $3,200, a credit is allowed in the amount of the tax multiplied by (3200 minus the tax), then divided by 1400.

The website of the New York City Finance Commissioner has tax forms and other information about the Unincorporated Business Tax.   read more »

Federal Obligations

As a small business owner (for-profit), whether a sole proprietorship, partnership, LLC or corporation, you must pay self employment tax and file Schedule SE to Form 1040 if you earn profits of $400 or more in a given year from the business. See the Self-Employment Tax page on the IRS website for details.

If your small business (including a nonprofit) has one or more employees, you will generally be required to withhold federal income tax from their wages. You also may be subject to Social Security and Medicare taxes under the Federal Insurance Contributions Act (FICA) and federal unemployment tax under the Federal Unemployment Tax Act (FUTA). If you are required to report employment taxes or give statements to employees, you need an employer identification number. See the Employment Taxes for Businesses page on the IRS website for details.

If your small business hires independent contractors, you need to report contract payments annually on Form 1099-MISC, which goes to the independent contractor and to the IRS. Please see the Independent Contractors vs. Employees page on the IRS website and the Employee Versus Independent Contractor section of this guide for details.   read more »

These are the general steps you need to follow in order to form a nonprofit corporation in compliance with local, state, and federal laws. For information specific to your state, please see State Law: Forming a Nonprofit Corporation.

a. Your mission

Take the time to write out a mission statement that identifies the societal need you wish to satisfy. Then outline how your nonprofit corporation will go about satisfying the need. See MinnPost.com for a terrific example of a mission statement in the context of online journalism.

This may sound like a distraction at first, but do not underestimate its importance: you will return to this statement time and again throughout the process, whether in preparing your articles of incorporation or planning your fundraising activities. You need to be clear about why you are investing time, effort, and money into forming a nonprofit organization not only for yourself, but because clarity of vision will help attract others to your nonprofit organization, whether as directors, officers, employees, or donors.
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If you choose to apply for 501(c)(3) tax exemptions yourself, set aside an entire day to devote to the form; the IRS says it takes ten hours for the average person to complete. While line by line guidance on how to fill out Form 1023 and advice on strategy are beyond the scope of this Guide, here are some things to keep in mind:

Assuming that your nonprofit organization has been established as public charity with a 501(c)(3) purpose, you do not have to apply for federal tax exemption if the organization's gross receipts are normally less than $5,000 per taxable year.

• The IRS states that a nonprofit organization does not normally have more than $5,000 annually in gross receipts if it had a total of:

i. $7,500 or less in gross receipts, during its first tax year

ii. $12,000 or less in gross receipts, during its first 2 tax years

iii. $15,000 or less in gross receipts, during its first 3 tax years   read more »

Surprisingly, there is no legal definition of a nonprofit organization. In general, a nonprofit organization is one that is organized to achieve a purpose other than generating profit. Despite this, a nonprofit organization is not precluded from making a profit or engaging in profit-making activities. It is prohibited from passing along any profits to those individuals who control it, like founders, directors, officers, employees, and members. Nothing, however, prevents a nonprofit from paying reasonable salaries to officers, employees, and others who perform a service for it.

This section is aimed at those seeking to start and operate a nonprofit corporation that is a public charity under section 501(c)(3) of the U.S. Internal Revenue Code (the "tax code"). A corporation is the most common and generally most appropriate structure used to create a nonprofit organization. You should seek the advice of an experienced nonprofit lawyer if you wish to establish a nonprofit organization using some other business structure.

Section 501(c)(3) of the tax code exempts certain nonprofit organizations from federal corporate income taxes. Gaining tax-exempt status gives a nonprofit corporation credibility with potential donors because it shows that the organization has a legitimate charitable purpose, a formal structure for accomplishing its goals, and is publicly accountable. Section 501(c)(3) tax exemptions are denied to any nonprofit organization engaging in certain political or legislative activities, which will be discussed below.   read more »

The profits of corporations are taxed twice -- once at the entity level (at the applicable state and federal corporate income tax rate), and again at the individual level when profits are distributed to individual owners as dividends (at the applicable individual income tax rate). Avoiding double taxation is one of the commonly noted advantages of operating as a sole proprietorship, partnership, or LLC. Nonprofit organizations that qualify for 501(c)(3) status are exempt from federal (and usually state) income tax at the entity level, so in a sense they avoid double taxation as well.

As noted, avoiding double taxation generally is considered advantageous, but it may not always prove beneficial, depending on your particular circumstances. Owners of businesses with "pass through" tax treatment must pay income tax on their share of the net profits of the business, regardless of the amount of money they actually take out of the business each year. Thus, even if all profits are reinvested into the business, the owners of these businesses must pay taxes on their share of the profits. Shareholders of a corporation, on the other hand, pay income tax only when those profits are actually  distributed to them as dividends. In addition, paying reasonable salaries to shareholders who participate in the operation of the business can ameliorate the burden of income tax at the entity level to a certain extent. Additionally, there may be situations where you as an individual pay income tax at a rate that is higher than the corporate tax rate.   read more »