Operating a business in the United States requires compliance with a complex framework of federal tax laws administered by the Internal Revenue Service (IRS). These laws are grounded in the Internal Revenue Code (IRC) and implemented through the Code of Federal Regulations (CFR), primarily Title 26 (Internal Revenue). Understanding how these rules apply to your business is essential for legal compliance, financial stability, and audit readiness.
This article provides a practical, compliance-focused overview of the most relevant business tax topics, including EIN registration, entity classification, income and payroll taxes, deductions, depreciation, employee compensation, and IRS audits. Regulatory citations are included to support SOP development, ISO-aligned documentation, and enterprise governance.
Employer Identification Number (EIN)
An Employer Identification Number (EIN) is the federal tax identification number used to identify a business entity. Most businesses are required to obtain an EIN to file tax returns, open business bank accounts, and administer payroll.
When an EIN Is Required
An EIN is required if the business:
Has employees
Operates as a partnership or corporation
Files excise, employment, or alcohol/tobacco/firearms tax returns
Withholds taxes on income other than wages
A new EIN is generally required when a business undergoes a significant change in legal structure, such as incorporating or forming a partnership.
Key Regulatory References:
26 CFR § 301.6109-1 (Identifying numbers)
IRC § 6109
Choosing a Business Entity & S Corporation Election
Business tax obligations depend heavily on entity classification. Common structures include sole proprietorships, partnerships, corporations, and limited liability companies (LLCs).
An S Corporation is not a separate legal entity but a tax election that allows qualifying corporations or LLCs to pass income and losses directly to shareholders, avoiding double taxation.
S Corporation Eligibility
Domestic entity
No more than 100 shareholders
One class of stock
Shareholders must be individuals or qualifying trusts
Election Process
To elect S Corporation status, businesses must file IRS Form 2553 within the prescribed timeframe.
Key Regulatory References:
26 CFR §§ 1.1361-1 to 1.1361-5
IRC §§ 1361–1379
Business Taxes Overview
Most businesses are subject to multiple categories of federal taxes depending on activities and structure. These commonly include:
Income taxes
Employment (payroll) taxes
Self-employment taxes
Information reporting obligations
Federal tax rules for businesses are primarily found in 26 CFR Subtitle A (Income Taxes) and Subtitle C (Employment Taxes).
Income Taxes
All businesses must report income annually. The specific form used depends on the entity type:
Sole Proprietors: Schedule C (Form 1040)
Partnerships: Form 1065
Corporations: Form 1120
S Corporations: Form 1120-S
Taxable income is generally defined as gross income minus allowable deductions.
Key Regulatory References:
26 CFR Part 1 (Income Taxes)
IRC §§ 11, 61, 162
Self-Employment Tax
Individuals operating as sole proprietors or partners are subject to self-employment tax, which funds Social Security and Medicare.
Self-employment tax is calculated using Schedule SE and is typically paid through quarterly estimated tax payments.
Key Regulatory References:
26 CFR §§ 1.1401-1 to 1.1403-1
IRC §§ 1401–1403
Federal Payroll Taxes
Businesses with employees must withhold and remit federal payroll taxes. These include:
Federal income tax withholding
Social Security tax
Medicare tax
Federal Unemployment Tax (FUTA)
Employers are responsible for both employee withholdings and employer-paid portions of certain taxes.
Key Regulatory References:
26 CFR Part 31 (Employment Taxes)
26 CFR Part 33 (FUTA)
IRC §§ 3101–3128, 3301–3311, 3401–3406
Employee Compensation & Employer Pay Obligations
Employer Pay Responsibilities
Employers must properly classify and report wages, salaries, bonuses, and taxable fringe benefits. Accurate payroll records must be maintained, and Forms W-2 must be issued annually.
Employee Pay
Employee compensation includes hourly wages, salaries, overtime, commissions, and tips. Employers must also comply with federal wage and hour laws.
Key Regulatory References:
26 CFR § 31.3401(a)-1 (Definition of wages)
26 CFR § 31.3121(a)-1
29 CFR Part 541 (Fair Labor Standards Act)
Employee Benefits & Fringe Benefits
Many employee benefits may be deductible by employers and excluded from employee income when structured correctly. Common examples include health insurance, retirement plans, and qualified fringe benefits.
Key Regulatory References:
26 CFR § 1.132-1 (Fringe benefits)
IRC §§ 125, 132
Business Deductions
Business deductions reduce taxable income and are only allowed when expenses are both ordinary and necessary in the conduct of a trade or business.
Examples of common deductions include:
Office expenses
Professional services
Marketing and advertising
Rent and utilities
Key Regulatory References:
26 CFR § 1.162-1
IRC § 162
IRS Recordkeeping Requirements
Businesses must maintain sufficient records to substantiate income, deductions, credits, and payroll.
Key Regulatory References:
26 CFR § 1.6001-1 (Records and statements)
IRC § 6001
Depreciation of Business Assets
Depreciation allows businesses to recover the cost of capital assets over time. Depending on eligibility, businesses may use:
Straight-line depreciation
Section 179 expensing
Bonus depreciation
Key Regulatory References:
26 CFR Part 1, Subpart B
IRC §§ 167, 168, 179
Meals, Travel, and Entertainment Expenses
The deductibility of meals and travel expenses depends on substantiation and business purpose. Entertainment expenses are generally non-deductible.
Key Regulatory References:
26 CFR § 1.162-2 (Traveling expenses)
26 CFR § 1.274-5 (Substantiation)
IRC §§ 162, 274
Automobile Expenses
Businesses may deduct vehicle expenses using either the standard mileage rate or the actual expense method. Only the business-use portion is deductible.
Key Regulatory References:
26 CFR § 1.274-5
IRC § 274
IRS Audits & Examinations
An IRS audit is a formal examination of tax returns to verify accuracy and compliance. Audits may be conducted by correspondence, office visit, or field examination.
Common Audit Triggers
Disproportionate deductions
Payroll or worker misclassification
Poor documentation
Audit Readiness Best Practices
Maintain written SOPs
Retain complete financial records
Respond promptly to IRS notices
Key Regulatory References:
26 CFR § 601.105 (Examination of returns)
IRC § 7602
Conclusion
Understanding federal tax obligations through the lens of the CFR provides businesses with a defensible, structured approach to compliance. By aligning tax processes with documented procedures, maintaining accurate records, and referencing applicable regulations, businesses can reduce risk, improve governance, and remain audit-ready.
This guide serves as a foundation for SOP development, compliance manuals, and enterprise tax education programs.