Small business owners are too busy running their own businesses to spend any more time than necessary on side issues like taxes.
However, it's critical to handle your small business taxes correctly, or you could get a nasty surprise from the IRS or other tax agencies.
It'd take a book to fully describe everything about the taxes small businesses have to pay. With that in mind, though, this guide will give you an introduction to taxes for business owners and provide you with a starting point for doing your tax planning — while still leaving you time to run your business.
What are the types of taxes businesses pay?
Businesses pay a wide variety of different types of taxes. Not every business pays every tax, but here's a sampling of some of the more common taxes you're likely to run into as a small business owner.
1. Income tax
All businesses that make a profit must pay income taxes at the federal level. Many states also impose business income taxes of their own, with similar but not always identical rules.
Specifics vary depending on the form of business you choose, but income tax often makes up a substantial portion of your overall tax burden.
2. Sales tax
If your business sells products or certain services, then you may be subject to sales tax. Businesses typically pass the burden of a state or local sales tax on to their customers, but it's up to you to collect the proper tax and send it on to the appropriate tax authority.
If you don't collect the sales tax, you're still potentially on the hook for paying it.
3. Property tax
Many state and local government entities charge businesses tax on the property they own. This can include real estate as well as tangible property such as business equipment.
4. Payroll taxes
If you have employees, you'll typically have to pay payroll taxes for Social Security, Medicare, and unemployment insurance.
You're responsible for withholding the appropriate payroll taxes from your employees' paychecks, but you'll also have to add in the employer portion of each tax.
5. Self-employment taxes
If your business is set up as a sole proprietorship, a partnership, or a limited liability company that chooses to be taxed as a partnership, you'll have to pay self-employment taxes on the income of the business.
This is different from a pure income tax, because the business itself pays no tax. Instead, the self-employment tax is borne by the owners individually, usually (but not always) in proportion to their ownership interest in the business.
6. Other taxes
There are many other taxes that can apply in certain cases, including excise taxes on certain goods such as fuel or alcohol, gross receipts taxes, franchise taxes, and dividend taxes on corporations. These taxes typically apply only to a select set of small businesses.
How can you determine the tax rate your small business will pay?
Each tax comes with its own set of rates, and the rate your business pays can depend on factors specific to each type of tax. Below, we'll look at several tax rate schemes that typically apply to small businesses.
Percentages of income
Income taxes and self-employment taxes are typically based on the net income of your business.
- Corporate tax rates at the federal level are 21%, and state-level corporate tax rates differ greatly from state to state.
- Sole proprietorships, partnerships, and LLCs often pay no tax at the entity level, but income is taxed on your personal income tax return at rates as high as 37% federally.
- Self-employment tax rates are 15.3% up to a certain maximum wage limit applying to Social Security payroll taxes, and 2.9% above that limit.
Percentages of gross sales
Sales tax gets charged on the revenue you raise from selling taxable goods or services, regardless of whether you make a profit.
Sales tax rates vary greatly from state to state, with some states charging no sales tax at all, while others have rates as high as 10% or more when you add local city and town sales taxes to the general statewide levy.
Tax per dollar of property value
Property taxes are charged against the assessed value of property.
Often, tax rates are stated in terms of the amount per $100 of value, which roughly corresponds to a percentage. For instance, a tax of $1 per $100 is essentially the same as a 1% tax.
Percentages of wages
Payroll taxes are generally collected on a percentage of the wages you pay to employees. Some of these amounts apply only to a certain amount of income, above which no further tax applies.
How to file your small business taxes
The exact process for each type of small business tax differs, so there's no one-size-fits-all procedure to follow. However, the following steps can give you general tax preparation checklist for your small business that you can fit and tailor to the specific taxes you'll owe.
Step 1: Learn about the tax
The best place to start learning about business taxes is the entity that's responsible for collecting it.
That's the IRS for federal income and self-employment taxes, your state secretary of state or department of revenue for state business taxes and local business taxes on sales or income, and your local business registration office for most property and other types of taxes.
There, you'll learn about which types of taxes apply to your business, and you can get good information about what's involved in filing small business taxes for the first time and paying any tax due.
Step 2: Collect your tax records and documentation
Once you know what's involved, the next step is to gather the supporting information that you'll need in order to inform tax authorities and calculate the proper tax.
Step 3: Fill out any required forms or information
Most taxes come with associated forms you need to complete.
For instance, income tax forms will have you put in your gross sales from your business, list any allowed deductions from your income, and then do the math to come up with taxable income and total tax due.
Sales tax forms, on the other hand, might only include your total receipts and then apply the percentage of the tax to the entire amount.
Increasingly, tax authorities are using online electronic filing to submit tax forms of various kinds. In some cases, you'll have to use an online filing method, while other tax collection processes give you the choice of a paper or electronic filing. Some people use tax software for filing business taxes.
Step 4: Send your filing to the proper tax authorities
Once you've completed any required forms, all you have to do is to get them to the tax authorities. Again, some people use paper filing by mail or overnight delivery service, while others prefer electronic submission when given a choice.
Don't ignore your business taxes
Perhaps the biggest mistake many small businesses make is not researching the taxes they have to pay. Not filing your taxes properly can get your business into big trouble.
By learning about any taxes that apply to your small business upfront, you'll avoid potential pitfalls and be able to spend more time making your business successful.