Small business taxes are often overlooked as there are so many aspects to take into consideration. If you are a business owner, check out this step-by-step guide to understanding business taxes.
Do you run a business, or are you thinking of setting up a business for yourself for the first time? Then you need to take your tax responsibilities seriously. Employers and business owners do not have anyone to withhold taxes for them – they need to count their profits and make their estimated payments of their own accord, on-time, every time.
However, paying your taxes as a business owner isn’t very cut and dry. You will be paying different amounts and will need to pay attention to different taxes depending on what kind of a business you’re running, the business structure your company has taken on, and the number of people you employ, among other factors.
What Small Business Taxes Are You Paying?
The big question is pretty simple, actually: what do I owe the government, and when?
But to answer that, we need to take a look at the factors that state and federal tax authorities use to determine what kind of taxes you need to pay.
Small Business Taxes 101
Before we go over the biggest factors affecting your tax liability, we need to figure out what taxes businesses usually must pay. If you run a business, you will most definitely need to work with a CPA or a tax professional if you want to not only stay on top of all of your tax liabilities but manage your taxes as efficiently as possible as well.
You can deal with it all on your own but note that this will be a massive time sink you could otherwise invest back into your own business, and other priorities.
Taxes to worry about as a small business owner include:
Income tax –
Business owners pay income taxes, just like employees do. The difference is that your income tax will either be represented by the company’s profits (for sole proprietorships and partnerships) or the salary paid out to you (for corporations and LLCs).
Self-employment tax –
Self-employment taxes represent the amount you need to pay for Medicare and social security. This is about 15.3 percent of your net income for the year.
Payroll tax –
If you employ people, you will need to withhold income taxes, Medicare, and social security from your employees paychecks as well.
Excise tax –
Companies in the business of manufacturing and certain industries need to pay excise taxes. Common examples include airline tickets, heavy equipment, tractors, tires, tobacco, and fuel.
Sales tax –
Aside from excise taxes, businesses that physically sell products need to pay sales tax. Some states also require businesses to pay sales tax on services performed.
Property tax –
If you own an office space, manufacturing space, hangar, or any other type of commercial property, then the property tax on that space also counts as a business tax. Again, both the IRS and state tax authorities can levy this tax on you.
While business owners are generally going to be more preoccupied with their taxes than the average employee, there are still distinct tax advantages to running a business of your own versus being on payroll. Business owners can issue far more tax write-offs than employees. Going golfing with a client? It’s a business expense. Taking a long trip across the country for a two-day conference? Lots of business expenses.
Determining Your Business Structure
Your business structure can substantially affect your tax liability. Generally, a business can be classified as one of four different legal entities:
- Sole proprietorship: A sole proprietorship is a business structure that does not separate you from your business, tax-wise. This means that, for tax purposes, the IRS will not recognize the business as separate from you, the business owner. This allows you to make use of a few unique tax deductions, but it can also make it more difficult to qualify for other deductions.
- Corporation: While the benefits of a corporation may outweigh the downsides for much larger companies, small businesses should generally avoid trying to structure themselves as a corporation. Corporations pay corporate taxes on income paid out to its members, and you in turn must pay income taxes on that income as well.
- Partnership: Partnerships are structured similar to sole proprietorships, with the difference being that the company’s profits are taxed as a share of each partner’s income.
- Limited liability company: LLCs are usually the most tax-advantaged when it comes to small business structures. An LLC separates the owner and the business, giving you the benefits of both corporation and partnership.
State Business Taxes
Once you’ve figured out your ideal structure, the next big factor is the state your business is based in. Federal and state business taxes are separate, and you have the most flexibility to affect your tax liability by choosing what state to base your business in.
Some states are explicitly business-friendly, with lower income and business taxes. Others are less friendly. Business-friendly states include Florida, Nevada, Utah, and others.
Differences can include whether a state has a business income tax or a corporate tax, whether a state has a sales tax, or whether a state has commercial property taxes.
Work With a Professional
At the end of the day, small business taxes can get very complicated very quickly. You may be paying completely different rates and taxes from your business owner peers depending on what you’re selling, the structure of your business, and the number of employees working under you.
Understanding what you need to pay and when is crucial, but it’s still beneficial to get a tax professional or certifiable accountant to work with you.
Not only can they help you navigate the waters of the IRS and state tax authorities, but they can give you expert advice on how to minimize your tax liability, cut down on unnecessary tax costs, and avoid tax debt.
Most crucially, working with a tax professional can help you accurately calculate and predict your estimated taxes, schedule your tax payments, and avoid ever having the tax man at your door uninvited.
We at Rush Tax Resolution help startups and established companies alike get behind their taxes, avoid and address tax issues head on, organize and deal with their taxes more efficiently, and we help them make the most of their revenue.