Small businesses operating in Massachusetts are subject to a number of both state and federal laws that affect the way their businesses are structured, how taxes are paid and what employment laws they must comply with amongst other legal obligations. The subject of legal compliance for small businesses is a huge one and only the taxation obligations and employment laws will be discussed in this article.
What is meant by a small business?
The federal Small Business Administration (SBA) defines a small business in the U.S. according to a certain number of criteria. These include the following:
- The business has fewer than a certain number of employees (500 is the usual number used);
- The business annual receipts are less than a certain figure; (less than $7.5 million is the figure used in Massachusetts for the state equivalent).
- The business is independently operated and is not dominant in its field;
- It operates for profit;
- The business has a base in the United States and makes a substantial contribution to the U.S. economy through payment of taxes, employment or use of U.S. products or materials.
Small business structures
Small businesses can operate in a number of different structures. These are as follows:
- Sole proprietorships, which means that they are owned and operated by a single individual. Liability for taxes and debts is held by the owner operator.
- Partnerships, which may have 2 or more partners; liability for taxes and debts are linked to the personal accounts of the individual partners.
- Limited liability companies (LLCs). Liability may be partially
- Corporations, which involve a number of shareholders. C corps are taxed at the corporation level as well as the shareholder level, while taxation in S corps is linked to the personal accounts of the shareholders.
Federal and state tax obligations compared for small businesses in Massachusetts
All small businesses must register their business with the IRS by obtaining an Employer Identification Number (EIN). The EIN identifies the business for federal tax purposes.
Similarly, all small businesses must register their business with the Massachusetts Secretary of the Commonwealth and register their business with the state’s Department of Revenue so that sales tax collected when goods and services are sold can be paid.
The state also requires small businesses to have a MassTaxConnect account so that state taxes can be paid.
These are the main federal taxes that small business owners must be aware of and pay as required:
- Corporate taxes are paid by both C and S corporations. A flat rate tax of 21% is paid by C corps, while individual shareholders of a S corp. pay taxes on income received as part of their individual personal tax returns.
- Employment taxes are paid when small businesses withhold required contributions from their employees’ payroll, including Medicare, Social Security and federal income tax.
- Income tax is paid by small business owners to the IRS.
- Self-employment tax in the form of payments for Medicare and Social Security are paid by sole proprietors and independent contractors.
If small businesses and self-employed individuals are likely to owe more than $1,000 in taxes or more per quarter, then they should make regular quarterly estimated payments to the IRS.
Small businesses are also liable for payment of various Massachusetts state taxes as follows:
- Corporate excise tax of 8% of corporate income is paid by corporations and a minimum of $456 in excise tax.
- State income taxes are withheld by small businesses from their employees’ payrolls in addition to federal income tax withheld.
- Sales and use tax at 6.25% must be collected and paid to the Department of Revenue on most goods and services sold by the small business.
- Self-employment taxes are paid by small business owners who are self-employed in addition to federal self-employment taxes.
Massachusetts State and Federal Employment Laws
These laws apply to small businesses which employ anyone in their business other than contractors. As can be seen, the laws tend to overlap so that much of the state’s employment laws are similar to but not necessarily the same as the equivalent federal laws.
The federal employment laws that small business owners must comply with are listed below with the state equivalents where they exist.
Most small businesses which employ employees on hourly wages operate under at-will employment terms. At-will employment means that employers can terminate their employees for almost any reason at any time. Employees can also leave their place of employment at any time without having to provide notice. At-will employment is restricted by both state and federal anti-discrimination and anti-retaliation laws which complement each other. These laws prevent small business employers from terminating an employee’s employment solely because they belong to a protected class or because they are retaliating against a justified action by an employee.
- Federal laws such as the Age Discrimination in Employment Act (ADEA), Title VII of the 1964 Equal Rights Act and its amendments, and the Americans with Disabilities Act (ADA) protect workers from unlawful discrimination by their employers. The state’s equivalent is the Fair Employment Law, which covers the same protected classes as the federal laws, but is somewhat more developed with greater protections for workers in Massachusetts.
- The Fair Labor Standards Act (FLSA) sets out minimum hourly wage, overtime and child labor protections. Massachusetts employment laws cover the same priorities as the FLSA but provide greater protections. For example, the federal minimum hourly wage remains at $7.25, while the state minimum wage, which small business owners must pay, is $15 an hour for non-tipped employees and $6.75 for tipped employees with employers required to make up the difference if tips don’t match $15 an hour in total.
- The Family and Medical Leave Act (FMLA) provides eligible employees with up to 12 weeks of unpaid, job-protected leave. The state equivalent is covered by the Paid Family and Medical Leave (PFML) legislation. The PFML ensures that employees can take 26 weeks of paid leave for family or medical reasons which qualify under the PFML rules.
- The federal Occupational Safety and Health Act (OSHA) sets safety standards in small business workplaces. Massachusetts also has laws which provide additional worker protection.
- The state makes it compulsory for most small businesses with very few exceptions take out workers’ compensation insurance to protect workers in the event that a worker becomes ill or has a serious injury due to their work. Workers’ comp. normally means that the affected workers cannot sue their employer in a personal injury claim and compensation excludes pain and suffering and punitive damages.
These are the main taxation and employment laws that small business owners must be aware of. There are other federal and state laws as well as municipal or local rules that owners need to become familiar with not described here. It is advisable to talk to a knowledgeable business law attorney in Massachusetts to be sure that as a small business owner you are compliant with all necessary laws.