Small businesses create 2 of every 3 jobs in the United States. As you start your own company, you will need to develop a consistent tax plan.
We will review 5 small business taxes at the local, state and federal level, which you need to know about.
Small Business Taxes
Did you know that there are more than 11,000 tax collection entities in the United States?
Unlike individual taxes, which are paid one day a year on April 15th, businesses will be paying their estimated taxes throughout the entire year to the Internal Revenue Service (IRS) – April 15th, July 15th, September 15th and January 15th.
This combines business, personal income and self-employment taxes.
This fact requires businesses to develop a coherent tax process, payment structure and strategy. Many small businesses will hire special tax accountants, so they can remain in compliance with all of the different tax types.
It is wise to thoroughly review your tax liability annually. A high tax liability can be a drain on your scarce capital. Finding the right corporate structure can give you more control over which taxes must be paid.
Some of the taxes apply to all small businesses. Others will depend on your activities, corporate structure and location, for instance, there are states with no income tax.
Here are 5 of the most important taxes that small businesses must pay.
1. Income Tax
Owners, partners or shareholders are responsible for payment of the business income tax – it all depends on your corporate structure.
And, to make it even more complicated, each organizational structure – Limited Liability Corporation (LLC), C-Corporation or S-Corporation – pays a different tax rate. Taxes are very complicated.
Moreover, there are also new laws, which come into effect each year. Local, state and federal legislatures adjust the tax rates and thresholds annually. Business owners can depend on very good tax software for help.
Limited Liability Corporations
The LLC is a “pass-through” entity where income is reported on individual income tax returns. This provides you with legal protection against lawsuits, without creating an organizational structure that is overly cumbersome.
The C-Corporation shareholder must pay a different tax rate on ordinary net income than he would on dividend income.
However, the S-Corporation will actually pass the tax liability to its shareholders. This can be lucrative in building up an unencumbered startup.
More of your investment dollars go towards actual business growth and less to paying taxes.
2. Self Employment Tax
Small business owners (sole proprietors and partners) must pay self-employment taxes.
Basically, the government figures that it cannot charge you payroll taxes – since you are not an employee – so, it charges you the self-employment tax instead.
For 2019, the self-employment tax is 15.3%. C-Corporation and S-Corporation owners, working as employees, are not required to pay this self-employment tax.
Read also: 9 Easy Ways to Reduce Your Bills with Tax Deductions
3. Payroll Tax
Both the employer and employee are responsible for the payroll tax.
Of course, the business owner is responsible for the pay cheque. So he must deduct the employment tax from the wages and keep track of what is owed.
The employee will receive a list of “Withheld Taxes” on his W-9 Form.
Most people don’t really understand the tax process. The government is really having you estimate your taxes and withholding on that basis.
When you file your taxes, you are partially confirming whether that estimation was accurate or not. This is an ongoing duty for business owners.
All payroll taxes include both Social Security and Medicare taxes. Social Security, which is called Federal Insurance Contributions Act (FICA) is for general expenses of retirees. Medicare is for the healthcare of retirees.
As of 2019, these are the following rates for payroll taxes:
- FICA Total is 15.3%
- Medicare Total is 2.9%
Employer and employee each pay half. Therefore, the employer pays 7.65% and the employee pays 7.65% of the Social Security Tax.
Unfortunately, ObamaCare made this employment tax estimation a little more difficult.
One of the categories that was impacted by the ObamaCare Law passage was the payroll tax.
A special ObamaCare Medicare 0.9% surtax was charged on high-income employees (for 2019, it was more than $250,000 for singles). This must be added to the normal Medicare tax for all employees that qualify.
4. Sales Tax
Every state has a sales tax, except for Alaska, Delaware, Montana, New Hampshire and Oregon.
If you are in any of the other states, then you are responsible for collecting, calculating and reporting sales tax to both the local and state governments.
At the merchandise point-of-sale, sales tax should be collected.
In order to pay state sales taxes, you must register with the state’s taxing agency. Calculate the sales tax rate, which must be charged.
Set up a process to collect taxes, complete records, send reports to the government and pay the sales tax.
Read also: What Makes FreshBooks The Best Accounting Software for Self-Employed People
5. Excise Tax
While the sales tax is a general tax on all merchandise, the excise tax is on a particular product.
You might see gasoline, tobacco or transportation targeted. For example, public transportation excise taxes might be used to maintain or improve public roads.
Generally, the United States Federal Government is trying to raise money for a variety of purposes. Highway maintenance is an ongoing expense.
Here are just a few of the IRS excise tax forms that you might need for filing:
- Form 2290 Heavy Highway Vehicle Use
- Form 6197 Gas Guzzler
- Form 6627 Environmental
The Gas Guzzler Tax is based on a vehicle’s fuel economy – ranging from about 22.5 mpg to 12.5 mpg. Generally, this charges a higher tax for vehicles that have worse fuel economy.
The Environmental Tax of IRS Form 6627 appertains to petroleum and ozone-depleting chemicals (ODCs). ODCs are another name for chlorofluorocarbons (CFCs).
If you want to learn about the general category, then you can read IRS Publication 510 “Excise Taxes.”
Many of these publications are in PDF format, making it easy for you to view using your Adobe software program. Learn about the specifications for your corporate fleet to see if you must file the IRS Form 2290 “Federal Excise Tax on Certain Trucks and Buses that use Public Roads”.
Develop a Tax Strategy
Paying taxes is a civic duty. Due to all of the varieties of local, state and federal taxes, you might want to develop a long-term tax strategy.
Look for credits, deductions and corporate structures that can help you reduce your tax liability.
About The Author
Alice Bell is a Los Angeles based freelance writer. She contributes to several lifestyle, business and finance blogs including Tax Crisis Institute. In a free time Alice adores cooking and yoga.
Stock Photo from WAYHOME studio @ Shutterstock