Starting a business is an exciting venture that comes with a lot of responsibility, whether the business is a mom-and-pop ice cream shop, a retail store, or a tech company. No matter the product, every business owner needs to acquaint themselves with Massachusetts law and know who to contact with questions about business topics ranging from tax code to health insurance requirements.
Most businesses are required to pay state income taxes, but different types of businesses must abide by different tax codes. Sole proprietors must pay personal income tax, while corporations and partnerships are subject to different requirements. If a business collects sales/use tax, the filing and payment schedule for paying the sales/use tax depends on the amount of tax expected to collect from customers in a year.
Sole Proprietors – Massachusetts Tax Rules and Regulations
Sole proprietors in Massachusetts must file a Form 1 or Form 1-NR/PY (non-resident/part-year resident) Income Tax Return, along with a Schedule C - Profit or Loss from Business or Profession , on or before the 15th of the fourth month after the close of the business’s taxable year. Sole proprietors expecting to owe more than $400 in Massachusetts income tax from their business must make estimated tax payments throughout the year using an Estimated Income Tax Payment Voucher (Form 1-ES). Massachusetts imposes no underpayment penalty as long as at least 80 percent of the total current tax year liability is paid on time or if at least as much in withholdings and/or estimated taxes is paid as the previous year’s tax liability and your taxable year was 12 months long.
Nonresidents and part-year residents are taxed differently than residents, and are expect to pay tax only on the income they received in Massachusetts, or source income. This income includes wages, salaries, tips, and other compensation received for work or services performed; rent, royalties, interest, and dividends derived from the ownership of personal property located in Massachusetts; and income from lottery or gambling winnings.
Corporations – Massachusetts Tax Rules and Regulations
Individuals interested in forming a Massachusetts-based corporation must file “Articles of Organization” with the Secretary of the Commonwealth’s Corporations Division, as well as properly notify the Internal Revenue Service (IRS), the Massachusetts Department of Revenue (DOR), and the Department of Unemployment Assistance (DUA). Corporations must also report earnings annually.
Generally, any corporation operating in Massachusetts is subject to the Commonwealth’s corporate excise tax. Corporate excise returns must be filed together with payment of tax due on the 15th day of the third month after the close of the corporation’s fiscal year. Corporations that expect to owe in excess of $1,000 in taxes must make estimated tax payments four times a year. Banks, trust companies, and other financial institutions are subject to a separate tax called the financial institution excise. Shareholder corporations and corporate trusts also have special filing requirements.
Partnerships – Massachusetts Tax Rules and Regulations
Partnerships between individuals, businesses, organizations, corporations, or trusts are not directly subject to income tax — each partner is instead taxed on their share of the income. Partnerships must report income annually via a Partnership Return of Income (Form 3) form and issue a Schedule 3K-1, or Partner's Massachusetts Information form, to each partner. Returns are due by the 15th day of the fourth month after the close of the partnership’s tax year.
Limited Liability Companies and Partnerships are subject to annual reporting and classified in the same manner in Massachusetts as they are for federal income tax purposes.
When it comes to new hires, changes of employment status, health and safety, unemployment insurance, and other key regulations, adhering to Massachusetts laws provides a better work environment for everyone.
New hire reporting helps the Department of Revenue ensure that children receive child support and that tax payers aren't subject to fraud. It is crucial to report new hires as well as lay-offs or terminations (when the employee had an active Income Withholding Order) to the Department of Revenue for this reason. Employers have 14 days to report new employees and independent contractors; failure to do so will result in fines and penalties.
Employers are responsible for registering with the Department of Revenue to withhold income tax from employees’ wages, and to remit those taxes to DOR on time. Employers must also obtain from each employee a federal W-4 Employee Withholding Allowance Certificate (and forward a copy to the IRS) and, if necessary, a completed Employee's Withholding Exemption Certificate (Form M-4) (and forward a copy to DOR) for each employee.
Business owners should ensure that they keep up-to-date on any changes to the minimum wage and overtime law, and to obtain necessary to protect customers and employees.
Finally, employers have several other obligations, including registering with the Department of Unemployment Assistance (DUA) to file quarterly wage reports, purchasing workers' compensation insurance, and providing proper health insurance coverage for their workers.