Once you start your business, you will have to start paying taxes to both the federal government and the Commonwealth of Massachusetts. The specific taxes you are required to pay depend on your type of business. The information in this section will help you navigate the sometimes confusing process of determining which taxes you must pay and what your filing requirements are.

FEDERAL IDENTIFICATION NUMBER

If your business is a partnership or corporation (with or without employees), or a sole proprietorship with employees, the first thing you must do is obtain a federal identification number for federal and Massachusetts tax purposes.

To obtain a federal identification number, you must file Form SS-4, Application for Employer Identification Number, with the Internal Revenue Service. This form can be downloaded from the IRS Web site, www.irs.gov, or you can have Form SS-4 sent to you by calling the IRS at (800) 829-1040. Businesses based in Massachusetts, Connecticut, Maine, New Hampshire, Rhode Island, Vermont, and New York, may fax a completed SS-4 to the IRS at (631) 447-8960, or obtain a federal identification number over the phone by calling (800) 829-4933.

Note: Sole proprietorships without employees (other than the owner), and which are not required to file excise, alcohol, tobacco, firearms do not need to obtain a federal employer identification number. They can use their Social Security number for business tax purposes.

STATE TRUSTEE TAXES

Trustee taxes are taxes that are collected and remitted by a business on behalf of the individuals who actually pay the taxes. In essence, the organization collecting and remitting the tax is serving as a trustee or agent. Sales, meals, withholding, and room occupancy taxes are state trustee taxes. There are also certain excise taxes you may be required to pay. You are required to register with the Massachusetts Department of Revenue for one or more of these taxes if you:

  • Have people working for you in Massachusetts;
  • Withhold from a pension or annuity plan or from retirement distributions;
  • Sell, lease or rent taxable items in Massachusetts;
  • Sell taxable telecommunications services in Massachusetts;
  • Serve meals and/or beverages in Massachusetts;
  • Provide lodgings in Massachusetts subject to the room occupancy excise;
  • Make regular or frequent out-of-state purchases on which a use tax must be paid;
  • Seek exemption from the Massachusetts sales and use tax as a charitable, nonprofit or governmental organization;
  • Are licensed by any city or town in Massachusetts to sell alcoholic beverages and are organized under Chapter 180 of Massachusetts General Laws;
  • Collect any of the convention center financing surcharges; or
  • Sell, acquire or import cigars and/or smoking tobacco or hold cigars or smoking tobacco for sale or consumption in Massachusetts.

For additional details on trustee tax filing requirements and assistance in determining which taxes apply to your business, please visit the Department of Revenue's Web site, www.mass.gov/dor, or contact DOR at (617) 887-6367 or toll-free in Massachusetts (800) 392-6089.

STATE AND FEDERAL BUSINESS INCOME TAX RETURN

Businesses and their owners are required to pay tax on business income. The type of tax they pay and the forms they file depend on how the business is organized. The tables below summarize your federal and state filing requirements. For additional detail, please consult a tax attorney, CPA or the resources listed at the end of this guide.

Sole ProprietorsState Form to FileFederal Form to File
Quarterly estimated payments
Due April 15, June 15, September 15 and January 15 of the following year.
Form 1-ES
If you expect to owe more than $400 in state tax
Form 1040 ES
If you expect to owe more than $1,000 in federal tax
Annual personal income tax return
Due 15th day of fourth month following taxable year, calendar or fiscal. If you file on a calendar-year basis, your return is due April 15.
Form 1 or Form 1 NR/PYForm 1040
Profit and loss from business or profession
Due with annual state and federal personal income tax returns
Massachusetts Schedule C or a copy of federal Schedule C if no changes; or Schedule FSchedule C (Or Schedule F for farm income)
Depreciation (if applicable)
Due with annual state and federal personal income tax returns
Copy of federal Form 4562Form 4562
Self employment tax
Due with annual federal personal income tax return
N/ASchedule SE
PartnershipsState Form to FileFederal Form to File
Return is due annually, by 15th day of the fourth month after the close of the partnership's taxable year, calendar or fiscal. Partnership must also issue Schedules 3K-1 to individual partners, and send copies of Schedules 3K-1 to the Department of Revenue. Partnerships have the option of sending these copies to the Department of Revenue electronically. Check the DOR Web site for information.Form 3 & Schedules 3K-1
Form 1040 ES
Form 1065 or 1065B & Schedules K-1
The following table shows which return each type of individual partner should use to report Schedule 3K-1 income:
Type of PartnerForm to File
Full-year resident individualForm 1
Nonresident/part-year resident individualForm 1-NR/PY
Trust or estateForm 2
Domestic corporationForm 355
Foreign corporationForm 355
Domestic corporation (part of a MA Combined group)Form 355C
Foreign corporation (part of a MA Combined group)Form 355C
Corporate trustForm 3F
Domestic S corporationForm 355S
Foreign S corporationForm 355S
CorporationsState Form to FileFederal Form to File
Small domestic corporationForm 355 SBC (small business corporation)Form 1120
Domestic corporationForm 355Form 1120
Foreign corporationForm 355Form 1120
Domestic corporation (part of a MA Combined group)Form 355CForm 1120
Foreign corporation (part of a MA Combined group)Form 355CForm 1120
Quarterly estimated paymentsSee schedule aboveSee schedule above
Annual tax liability under $250,000 (state)Form 355-ES (Annual tax liability over $1,000)Form 8109 or EFTPS (consult IRS)
S CorporationsState Form to FileFederal Form to File
Domestic S corporationForm 355SForm 1120-S
Domestic corporationForm 355Form 1120
Foreign S corporationForm 355SForm 1120-S
Corporate trustForm 3FForm 1120 or 1120A, or other form (consult IRS)

 

The following table shows which return each type of shareholder should file:

Type of ShareholderForm to File
Full-year resident individualForm 1
Nonresident/part-year resident individualForm 1-NR/PY
Trust or estateForm 2
Domestic corporationForm 355
Foreign corporationForm 355
Domestic corporation (part of a MA Combined group)Form 355C
Foreign corporation (part of a MA Combined group)Form 355C
Corporate trustForm 3F
Domestic S corporationForm 355S
Foreign S corporationForm 355S

UNEMPLOYMENT INSURANCE

In general, if you have employees working one or more days in each of thirteen (13) weeks (need not be consecutive) during a calendar year, or if you pay wages of $1,500 or more in any calendar quarter, you are liable for contributions under the Massachusetts Unemployment Insurance Law. A new or successor business must notify the Massachusetts Department of Unemployment Assistance (DUA) immediately by registering their business with DUA to establish an Employer Account Number (EAN) and UA Online User ID.  UA Online is a self-service system that allows employers to register their business, and manage their unemployment insurance account and services online.

Employers pay two separate contributions to fund unemployment insurance. The federal contribution is paid to the IRS under the Federal Unemployment Tax Act (FUTA). The state contributions paid to DUA are deposited into the Massachusetts Unemployment Compensation Fund, and are used solely to pay benefits to eligible workers filing claims against Massachusetts firms.

Your state contribution is "experience rated." How much you pay depends on a variety of factors, including the size of your payroll, the number of employees, and amount of unemployment insurance benefits charged against your account, and the amount of reserves in your account and in the Massachusetts Unemployment Compensation Fund. For more information please contact the Massachusetts Department of Unemployment Assistance (DUA) at (617) 626-5075, or visit their web site at www.mass.gov/dua

FEDERAL UNEMPLOYMENT INSURANCE TAX (FUTA)

The Federal Unemployment Insurance Tax (FUTA) is currently 6.2% of wages paid during the year. The tax applies to the first $7,000 the employer pays each employee as wages during the calendar year. Generally, you can take a credit against your FUTA tax for amounts you paid into the state unemployment funds. This credit cannot be more than 5.4% of taxable wages. The employer is responsible for FUTA tax. The employer cannot deduct it from the employee's wages. Taxes are determined by federal Form 940. For questions on FUTA you can contact the IRS at (800) 829-1040.

WORKERS' COMPENSATION LAW

The Department of Industrial Accidents (DIA) is responsible for overseeing the Workers' Compensation system in Massachusetts. The department can help you if you are an employer in Massachusetts, an injured worker, an insurer, or an attorney. The Employers' Guide to the Massachusetts Workers' Compensation System has been compiled to assist employers to better understand the Massachusetts Workers' Compensation System. Included in this guide are sections on: who must be covered; what injuries must be reported; the reporting/claim process; reducing your insurance rate, and other questions and answers. To receive your copy, please contact The Public Information Office, Department of Industrial Accidents, (800) 323-3249, ext. 470 or visit their web site at www.mass.gov/dia.

PAYROLL TAXES

The IRS, Social Security Administration and most states require employers to make appropriate withholdings from employee wages. They also require that withholding be deposited and a proper accounting made of such amounts withheld. Failure to make necessary tax payments in time can subject you to penalties and interest as well as potential liens against your property. Employers are required to withhold from their employee's payroll the following items:

  • Federal income tax.
  • State income tax. (This is a state "trustee tax"; see State Trustee Taxes section above.)
  • The employee's share of social security and Medicare taxes (FICA).

Additionally, employers are liable for the following taxes, which are related to or based upon payroll:

  • Federal unemployment tax (FUTA).
  • State unemployment insurance.
  • The employer's share of social security and Medicare taxes (FICA).

New requirements exist for filing certain information returns on magnetic media to the IRS depending upon the type of form and number of forms to be filed. Substantial penalties exist for failure to file on magnetic media if such reporting is required.

NEW HIRE REPORTING LAW

All employers, regardless of size or type of business, are required by law to report all newly hired employees, employees returning to work after 30 days, and independent contractors who will be earning $600 or more to the Massachusetts Department of Revenue (DOR) within 14 days of hire. This information is then compared to DOR's database of individuals who are required to pay child support. When there is a match, DOR notifies the employer to withhold child support and remit the funds to DOR for distribution to families entitled to support. The information is also used to combat fraud in programs run by various state and federal agencies. Visit the DOR web site at www.mass.gov/dor and click on the tab for businesses to learn more.

EMPLOYER REPONSIBILITY UNDER HEALTH CARE REFORM

Under Massachusetts' first-in-the-nation health care reform law, employers with 11 or more employees must make a "fair and reasonable" contribution to their full-time employees' health insurance costs. They are also required to establish a Section 125 Plan to allow all of their employees to pay their health insurance premiums on a pre-tax basis. By law, all Massachusetts adults must show that they have enrolled in a health insurance plan or lose their personal income tax deduction on their 2007 state taxes.

To learn more about employer responsibilities under the new law, contact the Commonwealth Connector at (877) MA-ENROLL or at www.mahealthconnector.org.