One of the complicated parts of managing your business is knowing and satisfying your tax responsibilities. Unlike personal income tax returns, which are usually completed with certain forms once a year, many other people are involved in preparing and filing business income tax returns. Especially if this is the first time of filing for small businesses, you probably have a lot of questions about how to do it, which forms to fill out, and when. We are here to help you.
This article aims to address what you need to know about how to identify your tax obligations based on your business structure, small business taxes, including the types of taxes you may be responsible for, and finally, when and how to pay and deposit the registration revenues.
First, let's explain the types of taxes for small businesses for which you, as an entrepreneur, can be held responsible for. As a general rule, business taxes can be divided into three levels: municipal taxes, state taxes, and federal taxes. As you know, your federal taxes are the ones you have to pay to the IRS, which accounts for most of the tax burden.
State and municipal taxes vary from state to state and municipality to municipality, so your liability will depend solely on the location of your business and tax laws in this location. Since these taxes will be exclusively for your business based on location, we recommend that you consult your local and national tax agencies for more information on these Business tax obligations.
That said, when it comes to federal (and sometimes even national and municipal) taxes, there are generally six types of business taxes for which you can be held responsible. This includes:
• Income Tax: The tax payable on the income the business earns.
• Self-Employment Tax: a tax that you pay, as an independent contractor, to cover social security and health insurance taxes, which are normally deducted from an employee's salary.
• Employment Tax: Also known as the tax on wages, it is a tax deducted from the wages of employees (if you have employees) for federal income tax, social security, tax Medicare income, and federal unemployment tax.
• Sales Tax: although there is no national sales tax, 45 states have a sales tax obligation. If you sell products and offer services, you may be accountable for collecting, calculating, and reporting sales tax.
• Consumer (Excise) Tax: the excise tax is a commission that you pay if your company is involved in certain services or goods, such as heavy trucks, air transport, fuel, and tractors.
• Property Tax: this is a tax you pay on any Business property, land, or property of your business. Any tax on the business property will be paid locally, depending on the location of the company.
In general, these are the basic principles for paying small business taxes:
• What types of taxes do you have to pay?
• How much you pay in taxes
• When you have to pay corporate taxes
• And how you pay business taxes
However, concerning these, these four basic concepts depend on the legal structure of your business. The type of business entity will determine the tax burden. Let us explain:
A proprietorship is a business owned and managed by an individual. As the owner of an exclusive property flies alone, tax registration within this Business structure is relatively simple.
Instead of filing small business income tax returns on behalf of the business as a sole proprietor, you will report income and losses on your income tax return. Business profits will be taxed at the personal income tax rate. Also, individual owners will be required to pay taxes on their account to cover the business owner's health and social security obligations.
That said, if you are a sole proprietor, you generally need to submit a C Schedule or a C-EZ Schedule with your Form 1040 and pay the estimated quarterly taxes.
The estimated tax, as we will explain in more detail below, is the method used by all businesses to pay social security and health insurance taxes, as well as income tax. If you were employed, don't worry: your employer would have these taxes for you. However, as a sole proprietor, you are accountable for making quarterly payments using the estimated tax method.
To calculate yourself what you will have to pay in taxes and, if you have to pay quarterly, you will use Form 1040-ES, estimated tax for individuals.
Partnerships are businesses managed by two or more owners. Owners of partnership businesses must pay income tax, self-tax, and estimated quarterly taxes.
If a business is operating as a partnership, it must file Form 1065, which is an annual statement of income showing the deductions, income, profits, and losses from the business. Partnership benefit is known as what is called "pass-through taxation," which means that income is taxed for entrepreneurs, rather than being subject to corporate tax rates.
Therefore, to file taxes on small businesses, owners included in the business must present their corresponding share of the company's income and losses on personal income tax returns. The weight of each partner in the company's revenues and losses is presented in Schedule K-1.
Irrespective of how small your business is, if it is structured as a C corp, your business will be legally separated from you as the owner. C Corps are subject to "double taxation."
For starters, C companies are subject to a tax rate of 21%. As a result, shareholders pay taxes on personal income tax returns when the profits are distributed in the form of dividends. The main corporate income tax C is Form 1120.
Shareholders who participate in the activity of the company are considered as employees. Only the employee's salary is subject to an autonomous tax. Dividends are subject to a specific tax rate for the various dividends. Many companies save their taxes by paying lower wages and getting more money from the company in distributions.
S Corps are transfer entities, such as sole proprietorships and corporations. This means that each shareholder reports the profits and losses of the business on the personal income tax return and that the profits are taxed at the personal income tax rate. S Corps submits an informative tax return, called Form 1120S, but the business itself does not pay income tax. This allows S Corps to avoid double taxation.
An LLC is a business entity that keeps owners legally separated from the debts or obligations of the business. As an LLC owner, you will have liability protection for a business with the tax benefits of a single company or corporation.
LLCs offer additional tax flexibility compared to other business entities. From a legal point of view, it can exist as an LLC. However, from a tax perspective, you have the option of paying taxes as an S or C corporation.
In addition to these taxes for small businesses, which you must pay and present according to the type of entity, you may also be subject to the other taxes we mentioned above, such as labor taxes, sales taxes, and property taxes, depending on your company.
David Macgregor