Small business owners are too preoccupied with managing their own companies to devote more time than necessary to ancillary matters like taxes. However, taxes are as important as other business aspects because the IRS or other tax authorities could negatively surprise you. Some people hire professional accountants, and others avail of the best online tax service. With that in mind, this guide will give you an overview of taxes for business owners and a place to start planning your taxes while still giving you time to run your business.
- Types of taxes
There are many different kinds of taxes that businesses have to pay. Not every company has to pay every tax, but if you own a small business, here are some of the most common ones you’re likely to run into.
The most popular tax paid by businesses is income tax. All companies that make a profit must pay income taxes at the federal level. Many states also have their own business income taxes, with rules that are sometimes the same and sometimes different. Depending on your business, there are various details, but income tax is often a big part of your total tax bill.
The next one is sales tax. This may apply to your business if you sell goods or specific services. Most companies pass on state or local sales taxes to their customers, but it’s your job to collect the right tax and send it to the proper tax authority. Even if you don’t collect the sales tax, you may still have to pay it.
You usually have to pay payroll taxes for Social Security, Medicare, and unemployment insurance if you have employees. You’re responsible for taking out the correct payroll taxes from your employees’ paychecks. You’ll also have to add in the employer portion of each tax.
- Determining the Amount
Each type of tax has its own rates, and the rate your business pays can change based on things specific to that type of tax. Following the abovementioned types of taxes, this section will help you examine a few tax rate structures that frequently affect small enterprises.
Income taxes, from the name itself, is based on the net income of your firm. Federal corporate tax rates are 21%, and state rates vary widely. Sole proprietorships, partnerships, and LLCs frequently pay no entity tax, but personal income tax rates can be as high as 37%.
Sales tax is levied on taxable revenue, regardless of profit. Some states have no sales tax, while others have rates as high as 10% or more when local city and town taxes are added to the statewide levy.
Most of the time, you pay payroll taxes based on a percentage of the wages you give to your employees. Some of these amounts only apply to people who make up to a certain amount of money, after which they don’t have to pay any more tax.
- How to File
The exact steps for each kind of small business tax are different, so there is no single way to do it. But the steps below can help you make a general tax preparation checklist for your small business that you can adapt to the taxes you’ll owe.
Start with knowing what government entity collects your taxes. The IRS handles federal income taxes, the department of revenue handles state and local business taxes, and your local business registration office handles most property and other taxes. From that, you’ll discover which taxes apply to your firm and how to file and pay small business taxes for the first time.
After that, the next step is to gather the information you’ll need to tell the tax authorities and figure out the right amount of tax. Most taxes have forms that you need to fill out. Tax authorities will have you submit the forms online. Some tax-collecting systems require online filing, while others allow paper or electronic filing.
Once you’ve filled out any forms you need to; you must send them to the tax authority. Again, some people use the mail or overnight delivery service to send in paper forms. In contrast, others prefer to use a computer.
The fact that many small businesses don’t look into the taxes they have to pay may be their biggest mistake. Tax mistakes may ruin a business. By understanding small company taxes in advance, you can avoid potential issues and focus on growing your business. Also, it is best to know more about how taxes work and what your business needs to pay taxes. This is because it will help you work with your tax professional to take full advantage of the laws.