Understanding the Tax World
By: Brittany Sickler
North Dakota District Office
Tax season has ended once more, to the relief of many. However, income taxes are hardly the only reason that a business would interact with state and federal tax entities.
Banks, vendors or other business partners will often request an identifying number. New business owners, confronted with all the legalities of opening a business, can be taken off guard and will ask “Where do I get an identification number?” or “What number are they looking for?” Well there are various types of identifying numbers that are required by a business depending on what activity is taking place. For example, if you are a corporation or partnership you will need to secure an Employer Identification Number (EIN) from the IRS, also known as a Federal Tax Identification Number.
Many new small businesses (sole proprietorships with no employees) have the idea that all businesses must have an EIN number. This isn’t always the case. You can legitimately use your social security number to transact business as a sole proprietorship – if you have no employees. However, other organizations such as banks or vendors typically request an EIN to open a business account, no matter how the business is structured.
The EIN is generally used to identify you as an employer and account for the deductions you make from employees’ paychecks. It is also used to account for payments you make to the IRS on the employee's behalf for withheld federal income tax and social security tax.
To see if you need an EIN, the best place to visit is the IRS website: www.irs.gov. Here you can easily review information on the situations that require an EIN, how to apply, and how changes within your business can affect your EIN status.
The State of North Dakota will require you to file with the North Dakota State Tax Department if you are required to withhold state income tax from employee’s wages. It is generally encouraged to have an ongoing relationship with your state tax department, as procedures tend to vary greatly between industries.
For example, on the sales tax side, confusion can result when a new business wishes to purchase products to resell in their business. Since some vendors sell to both a retail and wholesale market, they might be required to charge sales tax on the sale of these goods. The business owner who is purchasing these items may intend to resell these items to the end consumer. They may also be required to charge sales tax on this sale. This occasionally happens in businesses such as auto repair shops or small contractors.
In this case, the business buying the product may ask the seller not to charge sales tax as it is a purchase for resale and they plan to charge the customer the tax on the sale. The wholesaler can request a sales tax permit number in order to verify that the business is a legitimate sales tax permit holder and potential reseller of the product. Although some of these situations are a bit isolated, the complexity can be quite frustrating. New business owners should be fully knowledgeable of their responsibilities under the North Dakota state tax laws. To learn more about sales tax requirements, visit the North Dakota State Tax Department website at www.nd.gov/tax.
The North Dakota District Office of SBA and their resource partners, the Small Business Development Center (SBDC) and SCORE, sponsor training programs with both the IRS and the North Dakota State Tax Department. These programs address many tax issues for new and existing business owners. To learn about upcoming events, visit the ND SBA website at www.sba.gov/nd.
Brittany Sickler is an Economic Development Specialist for the North Dakota District Office. Prior to joining the SBA, Brittany served as a Peace Corps Volunteer Leader in Sustainable Community Tourism in Guatemala. She holds degrees in Business Administration and Spanish from Indiana Wesleyan University and a Master of Science in International Community Economic Development from Southern New Hampshire University. Brittany can be reached at firstname.lastname@example.org.