Although a seasonal business experiences income fluctuations throughout the year, they're expected to pay taxes like any other organization. Here's what you need to know about paying taxes as a seasonal business owner.
What is seasonal income?
Seasonal income is income earned from employment lasting 26 weeks or less throughout the year. For example, a pumpkin patch may earn most of its income from August through November. That business will likely hire part-time and seasonal help to get through the busy months. Those employees understand that once the season ends, they must find other work.
Taxes for seasonal employees
Seasonal businesses are responsible for paying sales and state taxes just like any other business, but there are some differences related to payroll taxes. Seasonal hires are subject to federal and state income taxes, and unless the employee is an independent contractor, you must also withhold Federal Insurance Contributions Act (FICA) taxes.
Let's look at some of the tax forms you may need your workers to complete:
- Form W-4: Form W-4 helps employers determine each employee's tax withholdings. However, most W-4s don't distinguish between part-time and full-time employment.
- Form W-9: If you work with independent contractors, you'll have each team member fill out Form W-9. A W-9 is used to record information about a contractor so their earnings can be reported at the end of the year.
- Form 941: You also have to file Form 941 to report your seasonal payroll. These forms only need to be submitted during the quarters for which those employees worked. For any tax quarters in which you didn't have seasonal employees, tell the IRS that you will not file a return by checking the "seasonal employer" box on Form 941 for every quarter you file.
It's also important to know the labor regulations governing the rights of seasonal workers. Adhering to the Fair Labor Standards Act helps you avoid hefty fines and penalties.
Other seasonal business tax considerations
Seasonal employees need to report their tips as taxable income. For example, a student waiting tables at a restaurant over the summer will need to keep track of the tips they earn during this time. According to the IRS, workers must report cash tips totaling over $20 a month to their employer.
If your seasonal business earns a net profit of $400 or more, you're required to fill out Form 1040-SE on your annual tax return. You're responsible for paying self-employment tax as well as income tax. Keeping detailed records of your receipts, payment information, and quarterly tax payments will make filing much easier during tax season.
Filing deadlines and estimated taxes
If you expect to owe $1,000 or more when you file your returns, you're required to make quarterly estimated payments. You can calculate your estimated taxes by using Form 1040-ES or having a certified public accountant calculate them for you.
Here are the due dates for quarterly estimated taxes:
- April 15.
- June 15.
- September 15.
- January 15.
Labor laws for seasonal workers
It's also important to know the labor regulations governing the rights of seasonal workers. Adhering to the Fair Labor Standards Act helps you avoid hefty fines and penalties. These laws include paying seasonal employees the minimum wage and granting overtime protections.
That means you must pay a minimum hourly wage of at least $7.25 per hour and 150% of the base salary for overtime work. This rate may be even higher depending on where your business is located. Washington, Colorado, and Massachusetts all have higher minimum wage limits than the national level.
Managing cash flow for seasonal businesses
Cash flow management involves tracking and managing the cash that flows in and out of your business. Sufficient cash flow management ensures that seasonal businesses have the cash on hand needed to quickly ramp up production and hiring to meet the increased demand.
The best way to manage cash flow is by using budgeting and forecasting tools to prepare before the season begins. Analyzing your financial data can help you determine when you need to begin hiring seasonal staff and how much inventory you need to order. If you don't have the cash on hand, a line of credit can help you manage these expenses.
It's also a good idea to build up a cash reserve to get through the seasons when little to no money is coming into your business. Cutting costs during the off-season can also help you conserve cash.
This article was originally written by Emily Heaslip.
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