For many small businesses, staying on top of their taxes can be a trying ordeal. From paying estimated taxes to employment taxes, it seems that the amount of money and paperwork is never-ending. And yet, paying taxes is of course necessary—at least if you want to remain in business. In this article, we look closer at the taxes associated with running a small business as well as best practices as far as how and when you will need to pay your business taxes.
The different types of business taxes
The taxes that you will pay will in part be determined by how your company is structured. So for example, a C Corp will pay different taxes than a sole proprietorship. Generally speaking though, there are three primary types of business tax.
Income Taxes
Regardless of what type of business entity you have, you are going to have to pay income tax in some capacity. If you have a corporation, you will be taxed at the corporate rate. Most of the other business structures have pass-through options as far as income tax goes.
Estimated Taxes
Estimated business tax is mainly relevant to sole proprietors and also freelancers who know that they are going to owe money in taxes throughout the year. Based upon the IRS's published timeline, you will remit an estimated quarterly tax payment. It is critical to go ahead and make your estimated tax payments on time and for the adequate amount as failing to do so can result in penalties and fines.
Employment Taxes
If you are self-employed, you will have to pay self-employment tax. These consist of social security and Medicare taxes. You will pay these business taxes if you make more than $400. If you have employees, you will have to pay employment taxes which include Social Security and Medicare taxes and federal unemployment tax.
Additionally, beyond these three types of business taxes, there are also going to be some industry-specific taxes that you may be responsible for, such as the tax on alcohol and tobacco sales for instance.
Paying your business taxes
How much and also how you pay your business taxes will largely be dependent on how you set up your company. There are primarily two ways that businesses pay their taxes.
C Corps
For any business that is set up as a C Corporation, the income tax rate is 21%. Keep in mind though that with a C Corp the profits are taxed twice. That is to say, the company will pay the 21% income tax rate, but then, however, the dividends that get paid out to shareholders will also be taxed on the shareholders' tax returns.
Pass-Through Business Structures
When talking about pass-through entities, the income is taxed as it would be on the company owner's tax returns. So unlike with a C Corp, there is no double taxation here. All income is only taxed once at the rate that applies to personal returns. The following structures are considered pass-through entities.
- Sole Proprietorship: This is a business structure with a single owner. The owner has no liability protection and therefore, in essence, business and personal are the same in a sole proprietorship. Business income would just be taxed as the owner's income.
- Partnership: This is a company owned by at least two or more people. There are both limited partnerships as well as limited liability partnerships. With limited, only one person has unlimited liability. So if something does happen and the company does have to pay out, only one of the partners is on the hook. With a limited liability partnership, all relevant partners are protected as far as company debts and liabilities go. When it comes to taxes, the business profits get divided among the partners and the partners' incomes would then get taxed on their returns.
- Limited Liability Company (LLC/): With an LLC, the owners are protected from the business's debts and liabilities. And with business taxes, the profits from the company can pass through to personal income tax. That said, members of an LLC do still have to pay self-employment taxes as well.
- S Corporation: While an S Corp still is a corporate structure, the way it is set up in terms of business taxes is so that the money can pass through to the owners' taxes and therefore they avoid the double taxation that you have with a C Corp. An S Corp does have some limitations that a C Corp does not, such as there can only be up to 100 shareholders and all must be citizens of the US.
State and Local Taxes
The above are federal taxes that businesses must pay to stay in good standing. Depending on your state, there are likely going to be some state and local taxes that you will also have to pay. For example, many states require businesses to pay state income tax. There are a few states that do not have requirements as far as business income tax; that said, it is important to understand exactly what your state's requirements are to this end.
From a local standpoint, you may also have to contend with business property taxes. If you own a physical location where you conduct your business, your county/city will likely require property tax payments. Additionally, you will probably have to pay sales tax in conjunction with your business. For this, you will need to know how your state charges. Some will charge based on seller location, while others will base it on buyer location.
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