Small Business Taxes Made Easy: Your Step-by-Step Guide

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.

Everything to Know About the Employee Retention Credit for Businesses

The employee retention credit was created to incentivize businesses to retain employees throughout the pandemic, but what is this tax credit and what does it mean for your business?

When the coronavirus first began impacting the global economy, world leaders took steps to try and mitigate the damage the virus would do to businesses and workers. In the United States, the first of these relief efforts came in the form of the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020.

Among other provisions, the CARES Act introduced COVID-19 related employee retention tax credits. Since then, two more laws have expanded and extended the deadlines for businesses qualifying and applying for the employee retention credit, while making amendments for who can qualify, and how.


What is the Employee Retention Credit?

The employee retention credit is a refundable tax credit for qualified businesses, equivalent to 50 percent of qualified wages (defined as up to $10,000 per employee annually, i.e. a tax credit of $5,000 per employee). Originally, this tax credit applied to all qualified wages paid from March 12, 2020, until December 31, 2020.

Under the original provision, an eligible employer was defined as any business owner running a non-government trade or business that either had to fully or partially suspend operation due to appropriate governmental orders, or any business that experienced a significant decline in a quarter’s gross receipts, as per the IRS’ definition (less than 50 percent of the gross receipts for the same calendar year of 2019).

The goal behind the employee retention credit was simple – to incentivize keeping employees on the company payroll despite taking heavy losses, either due to the virus’ impact on the economy, or due to direct intervention and limits implemented by local or federal government authorities to halt the spread of COVID-19.


Changes Made to the Employee Retention Credit

We are well into the second half of 2021 now, so it only stands to reason that the employee retention credit was extended. And so, it was – not only once, but twice, first with the Consolidated Appropriations Act, and again with the new American Rescue Plan Act, both of which were enacted in 2021.

The first significant change to be aware of is that the deadline has been extended to December 31, 2021, as of the American Rescue Plan Act. The credit remains available to all qualified employers who have had business significantly impacted by a government order, or who have not recovered to at least 80 percent of pre-COVID levels.

The second significant change is that the Consolidated Appropriations Act allowed businesses to claim up to 70 percent of qualified wages paid to employees, with a limit of $10,000 per employee per quarter, for the first two quarters of 2021 (maximum tax credit of $7,000 per employee per quarter). It also dropped the requirements for gross receipts to 20 percent less than what they were in the equivalent quarter of 2019 (or the quarter the business was started in, for new businesses), rather than 50 percent.

Then, the American Rescue Plan Act extended the previous amendment throughout all four quarters of 2021 and added a special provision for recovery startup businesses that launched after February 15, 2020, providing a tax credit of up to $50,000 per quarter if the business averaged less than $1 million in gross receipts and did not otherwise qualify for the employee retention credit.

The American Rescue Plan Act also allows businesses to qualify based on a 20 percent drop from the previous calendar quarter, rather than the corresponding quarter in 2019.

Announcements made by the IRS in early August clarified that the tax credit does not apply to qualified wages in connection with a shuttered venue grant under the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act, or a restaurant revitalization grant.

Furthermore, employers may exclude from their gross receipts any items pertaining to loan forgiveness for Paycheck Protection Program (PPP) loans, shuttered venue grants, or restaurant revitalization grants.


What Businesses Are Eligible for the Employee Retention Credit?

Any business forced to close due to a government order, or with gross receipts of less than half of the receipts of the same quarter in 2019, is eligible for the employee retention tax credit.

The latter is meant to help businesses that were not forced to close in response to the coronavirus due to their essential status (pharmacies, supermarkets, other critical goods, and material shops) or telework status (tech firms, businesses that operated remotely), yet still suffered massive losses.

Furthermore, as mentioned previously, a special employee retention credit is now also available to qualifying recovery startup businesses under the American Rescue Plan Act. These are startup businesses started on or after February 15, 2020, with less than $1 million annual gross receipts, who are not already eligible under previous requirements. This is a flat tax credit of $50,000 per quarter.


What Are Governmental Orders?

The IRS considers a business to qualify if trade is partially suspended by restrictions enacted by the appropriate government authority, limiting commerce, travel, or group meetings, to such a point that the business cannot operate at full capacity. For more information, visit the IRS’ page on how to determine whether operations can be considered partially suspended due to a governmental order.


What Wages and Compensation Qualify?

Qualified wages are defined as any wages and compensation paid between March 12, 2020, and December 31, 2021, including qualified health plan expenses, in times of economic hardship as described by a suspension in trade, or drastic decline in gross receipts.

Companies with over 100 full-time employees can only count wages paid to employees who are not providing services due to suspension of operations. Smaller companies can count all wages paid during economic hardship, as defined above.


How Do Businesses Apply for the Tax Credit?

Eligible employers must report all total qualified wages and health insurance costs per quarter on Form 941, the employment tax return.

Employers can also use Form 941-X to retroactively file for eligible quarters in which qualified wages were paid.

If a reduction in employment taxes is not enough to cover the full credit, an employer may use Form 7200 to request an advance payment from the IRS to cover the rest.


Employee Retention Credit and PPP Loans

Prior to changes made by subsequent acts, the original CARES Act did not allow employers who had claimed a PPP loan to claim the employee retention credit as well.

Since then, an amendment was made to allow employers to claim the tax credit and the loan, provided that qualified wages are not counted both for the employee retention credit and as payroll costs used to qualify for forgiveness of PPP loans.

If you qualified for both an employee retention credit and a PPP loan, and want to better understand their interaction, consult the IRS’s publication on the matter, and visit a tax professional to review the details of your own company’s situation.

If you are having payroll tax problems, consult our professional tax attorneys today.