Understanding Small business taxes and what small businesses must pay.

Taxes for small businesses: an overview

Small businesses are required to pay taxes on their income, profits, and other taxable activities. In general, small business owners must keep accurate records of their income and expenses, file tax returns, and pay taxes on time. 

Depending on their structure, location, and industry, small businesses may be subject to income tax, self-employment tax, payroll tax, sales tax, and others. Getting personalized guidance and advice from a tax professional or accountant can help small business owners understand their taxes better.

Let’s examine the different types of taxes small businesses typically pay in this article.

Business Taxes:

Business taxes are taxes that small business owners are required to pay on their income, profits, and other taxable activities. Small businesses may be subject to different types of taxes, depending on their location, industry, and business structure. The following are some common business taxes that small businesses may need to pay:

1. Income Tax: 

Small businesses must pay federal and state income taxes on their profits. All businesses, whether profitable or not, must submit an annual income tax return. Your firm’s return may be part of your personal tax return or a separate form.

Your organization’s legal structure will also influence which forms you file.

Even though a return is only required once a year, income tax is paid when money is generated during the year.

Taxes are often deducted from employees’ salaries, while businesses pay taxes on a quarterly basis.

The government requires some businesses to make anticipated tax payments to ensure that they are never behind on their payments. Anything else can be paid when you file your return.

Here are the tax payments made by businesses with different legal structures.

Sole Proprietorship

A sole proprietorship is a firm owned and operated by one person. An individual and business are treated the same for tax purposes, and the business is taxed through the owner’s personal tax return. Profits are also subject to self-employment taxes, which cover Social Security and Medicare.

Limited Liability Corporation

LLCs can be considered corporations, partnerships, or part of the owner’s tax return by the Internal Revenue Service (IRS). An LLC with one member is treated as a sole proprietorship, but one with two or more members is treated as a partnership. By filing paperwork with the government, an LLC can also become a corporation. 

Partnership

A partnership is a company that is owned by two or more persons who have signed a partnership agreement and invested in it. The partnership as a whole does not pay income tax, but the partners do on their individual tax forms. The partnership, on the other hand, is required to submit an information return that details the entire amount of revenue, costs, and other deductions, the partnership’s net income, and the percentage of the income ascribed to each partner.

Corporation

Corporations are made up of shareholders who own shares in the firm and pay taxes on their earnings as they come in. Profits transferred to shareholders must be taxed, resulting in a type of double taxation. Company income taxes are paid at the corporate income tax rate, which is normally lower than the personal income tax rate, however, owners pay at the individual rate.

S Corporation

In the United States, S-corporations qualify for preferential tax treatment. An S-corporation’s income, deductions, and credits are passed through to its shareholders.

S-corporations are exempt from federal income taxes. Instead, shareholders pay tax on their portion of the S-corporation’s revenue. The IRS requires S-corporations to file an annual tax return, which largely reports the company’s income, deductions, and credits. State and local taxes may also apply to S-corporations depending on state legislation.

2. Self-Employment Tax:

Self-employed individuals must pay a self-employment tax to cover their Social Security and Medicare obligations. Everyone employed in the U.S. pays Social Security and Medicare taxes. They will pay half and deduct the remaining half directly from their paycheck if they work for an employer. If they work for themselves, they must pay 100% and make FICA (Federal Insurance Contributions Act) contributions on their own to still receive retirement, disability, survivor, and Medicare benefits.

3. Employment Taxes: 

If you have employees, you must pay certain employment tax responsibilities, such as Social Security, Medicare, and Federal Unemployment. Employment taxes encompass FICA payments for Social Security and Medicare, income tax withheld from employee’s pay checks, and the federal unemployment tax (FUTA). Companies must remit these funds to the government on a monthly or semi-weekly basis, withholding half of the amount from employees’ wages and paying the other half themselves. The FUTA is reported separately from income and paid directly into the business’s account. Businesses must compile and submit various forms detailing how much wages, tips, and other forms of compensation were paid to each employee at the end of the year. It is most common to use the W-2 form, but other forms may be applicable depending on the type of payment.

4. Excise Tax: 

Certain products, businesses, and products might be subject to excise taxes depending on how they are manufactured, sold, used, or operated. An example would be gasoline or alcohol.

Payroll Tax

Employers must withhold payroll taxes from employees’ paychecks and pay them to the government on their employees’ behalf. There are taxes on income, Social Security, and Medicare (FICA). Depending on the employee’s wage and salary, payroll taxes have to be withheld and paid. Failure to do so will result in fines and interest charges.

Employers may be required to withhold payroll taxes from employees’ paychecks and pay them to the government. The following are among them:

1. Social Security tax (FICA): This tax funds the Social Security program and is normally taken at a rate of 6.2% of an employee’s salary.
2. Medicare tax (FICA): This tax, which normally amounts to 1.45% of an employee’s salary, finances the Medicare program.
3. Federal income tax: The amount of income an employee earns is determined by the information provided on their W-4 form.
4. State and local income tax: Many states and municipalities impose their own income taxes, which employers must withhold and pay.
5. Unemployment tax: Employers pay this tax based on the wages they pay to employees to fund state unemployment insurance programs.

State Tax

Aside from the federal government’s requirements, your state and local governments may have their own. A company’s legal form determines how and when they are paid, just as with federal taxes.

Furthermore, most states will require contributions for unemployment and workers’ compensation insurance. Businesses operating in multiple states may have to pay income and sales taxes in each state.

Sales Tax

There are different laws governing which companies must collect sales tax, how much it is levied, and for what it is charged at the state and municipal levels.

Any time you sell goods or services, you must collect sales tax and remit it to your state’s department of revenue.

On items you sell within your state or to residents of your state, sales tax is levied on top of the price.

As an online merchant, you are only required to pay sales tax in states where you have a physical presence. There are no sales taxes in Alaska, Delaware, Hawaii, Montana, New Hampshire, and Oregon at the moment.

Property Tax or Real Estate Tax

Small businesses that own property, such as a building or land, may be required to pay property taxes to the local government. A business may also have to pay property taxes if they own vehicles, or maintain inventories. Real estate and personal property taxes are collected by many state and local jurisdictions.

Franchise Tax

It is common for states to impose franchise taxes on businesses. Companies, LLCs, and some partnerships are required to pay franchise tax in some US states in order to do business there. Typically, the net value of a company is based on its assets or shares outstanding.

Taxes on franchises vary widely by state, while corporate income taxes tend to be lower in states with higher corporate income taxes. In order to be subject to a state’s franchise tax, you do not have to have a physical presence there. You may be subject to franchise taxes if you ship or dispatch there.

If you do business in many states, you should consult a tax specialist.

When is the best time for small business owners to file their taxes?

Business entities have different deadlines for filing taxes.  The filing deadline for federal income tax returns for sole proprietors and single-member LLCs is typically April 15th, although it may be extended to May or June in some cases.

The deadline for partnerships and LLCs with multiple members is March 15th of each year, although it can be extended.

S-corporations are also required to file by March 15th, though the deadline may be extended.

The deadline for C-corporations is generally the 15th day of the fourth month following the end of the fiscal year. As a result, if the corporation operates on a calendar year, the deadline would be April 15th of the following year.

These deadlines may change due to holidays, weekends, or other factors, so it’s always a good idea to consult the IRS or a tax professional.

Final thoughts

There is a great deal of importance for small business owners to be aware of the different taxes that they are required to pay and to plan and budget accordingly. By working with a tax professional, a business owner can ensure that all of their tax obligations are met as well as take advantage of all of the deductions and credits that are available to them. See our page for more information about BFG’s Tax Planning Services.

FAQs

How often do small businesses pay taxes?

Federal income taxes are required annually, while estimated taxes are due quarterly, and employment taxes must be paid monthly or twice per month. The particular due dates for federal income taxes, anticipated taxes, and employment taxes may change from year to year, depending on weekends and holidays. The IRS provides an online tax calendar to help in determining the exact dates for the current tax year.

What happens if you don’t file business taxes?

Failure to file and pay federal taxes carries penalties, including income taxes and employment taxes. Penalties can be imposed if returns and reports are not filed on time, erroneous returns are filed, and insufficient tax is paid. It is common for owners of small companies to underestimate their tax liability, resulting in underpayment penalties.