Posted by Abundant Wealth Planning LLC

The Taxes Your New Business Has To Pay

The Taxes Your New Business Has To Pay

All businesses have to pay different types of taxes, some easier to understand than others. Corporate taxes are of different types: federal, state, and local.

There are also different types of taxes based on different business activities, such as the sale of taxable products or services, use of equipment, ownership of business assets, self-employment rather than employment, and, of course, profit-making.

For example, if you are self-employed, a contractor, or a small business owner, you are not an employee, so the money you take out of your business is not a salary. You pay taxes on your share of the company's profits.

If you are starting your own business, you need to know what taxes to pay. If your business has changed, if you've bought properties or started hiring employees, for example, you'll need to know the taxes on these activities.

Business taxes are generally due in the spring. However, Texas businesses were granted an extension of tax reporting for 2020 due to the emergency winter storm. If you're in Texas or another area with a similar disaster declaration, you have until June 15, 2021, to file your taxes for 2020.

Small Business Income Tax

All businesses must pay taxes on their income; that is, the company must pay taxes on its profits. The way this tax is paid depends on the form of the business.

Most small businesses are pass-through entities, which means that corporate taxes are passed on to owners on personal income tax returns.

Income taxes and self-employment taxes (Social Security / Medicare tax) are based on the business's net income in the year. It is the same as income (income minus expenses). If you share a business with others, the net profit is shared among all the owners, depending on your agreement.

Individual owners and owners of single-member LLCs pay income tax based on the net income of their business.

To determine your net income, you must complete Schedule C on your income tax return. Net income from Schedule C is added to other sources of income to determine total tax.

Partnerships and owners of multiple LLC members submit a business partnership income statement for informational purposes only.

Individual partners or members of the LLC pay taxes on the income of their business. They receive a Schedule K-1 that shows their business income by adding this program to personal tax returns.

LLC owners pay taxes as individual owners (sole proprietor) or a partnership (multiple owners). Some LLCs may choose to pay taxes as a corporation. S corps are similar to partnerships. The S corporation owners share their business income, and each owner receives a Schedule K-1 to include on their tax return.

Starting in 2018, you may be entitled to a new 20% tax deduction, called the Qualified Business Income Deduction, in addition to the normal business expense deductions. This deduction is for individual owners, partners, LLC owners, and S Corps owners. The deduction may also be claimed for certain dividends for shareholders of the company.

Income taxes for Corporations

Businesses pay income tax as separate entities from their owners. The corporation files an income tax return on IRS Form 1120 for that year.

The corporation's net income is not taxed unless the company distributes it to shareholders, usually in dividends. Profits held within the company are classified as retained earnings.

Self-employment tax on each owner's share of business income

Self-employment taxes are taxes paid by individual owners, partnership partners, and LLC owners for Social Security and Medicare, based on the business's net income. The owners of the business are shareholders; they are not autonomous. Business owners are not considered self-employed and do not pay taxes on their own.

Self-employment tax is paid on the net income of the business. If there is no net profit for one year, there will be no tax on independent activities. It also means that you will not receive any Social Security/Medicare credits that year.

You need to calculate taxes on your account using Schedule SE and add the total tax due to your tax return.

Tax estimation for entrepreneurs

Since you are an entrepreneur, no one withholds income tax and personal income tax from the money you take out of the business. (Remember, you don't get a salary because you're not an employee.) The IRS requires that these taxes be paid throughout the year, so you must pay the estimated taxes quarterly. The first installment of the year is due on April 15, then again on June 15, September 15, and January 15 of the following year.

Texas businesses have also received an extension to send estimated tax payments for 2021 as a form of disaster relief. The estimated income tax payments due on April 15, 2021, as well as payroll tax and quarterly excise duties normally due on April 30, expire on June 15, 2021.

The estimated form of business owner taxation combines personal and business income and taxes, including self-employment taxes.

Sales tax for goods and services sold in certain states

Businesses do not pay sales taxes directly for the products and services they sell. But if your business operates in a state that has an income tax, you need to establish a system to collect sales tax from your customers and report and pay the tax to your state.

Traders in most states are required to collect sales taxes and pay them to the state revenue department.

Specific products and services are eligible for sales tax under state law. Money should be collected from customers, reported, and paid for regularly.

Don't forget the sales tax for the items you sell online. A recent court ruling gives states more freedom to collect sales taxes from their state's online retailers. This means that you may need to collect sales tax from your online customers and pay them regularly.

Commercial property tax

The property tax is a local tax. Suppose your business owns real estate (real property), such as an apartment building. In that case, your business must pay property taxes to the local tax authority, which is usually the city or county where the property is located.

The tax is based on the appraisal value and personal property, such as a house. There are special considerations for paying federal taxes on the sale of commercial property. You may have to pay capital gains tax for the difference between the original cost and the selling price. Always seek the help of a tax professional before selling any commercial property.

Excises Taxes on Use and Consumption

A business pays excise taxes for certain types of use or consumption, such as fuel and other activities, such as transportation and communications. Excise taxes are paid to the IRS quarterly or annually, depending on use, using Form 720.

Payroll or Employment Taxes Paid on Employee Earnings

Payroll taxes are taxes paid by employees and employers, which include:

  • Federal employee income tax withholding

  • Federal Insurance Contribution Act (FICA) taxes on social security and health insurance, paid by employees and employers.

  • Federal unemployment tax act (FUTA) paid by employers.

There are several steps in this process for federal income taxes and FICA taxes:

  1. Calculate federal income tax and FICA tax contributions for the employee and employer based on the employee's gross salary.

  2. Withhold these taxes from the salaries of employees.

  3. You pay these taxes to the IRS, including your FICA taxes as an employer, by depositing the full amount monthly or every two weeks, depending on your salary amount.

  4. Report amounts owed and paid quarterly on IRS Form 941 and pay any additional payroll taxes due.

Unemployment taxes are separate; they are paid in full by employers and not by employees. The amount you owe as an employer is calculated based on a portion of your employees' income.

State income tax and Gross receipt tax 

Most states impose an income tax for businesses. But some states, like Texas and Nevada, impose gross income tax on businesses in place of or in addition to income tax.

In these states, gross business income is taxed. Some states allow deductions for this tax, and some businesses in some states are not required to pay this tax.

Sole proprietorships are generally exempt from gross income tax but not from income tax.

Dividend tax for corporate shareholders

If you are a business owner, you are a shareholder. This means that you pay tax on any income you receive from dividends. Each company decides when to pay dividends and the amount of the dividend.

Dividends are not considered income, and you must pay a special tax rate on dividends received on your tax return.

You will receive a Form 1099-DIV with the amount of the dividend paid that year. You should include this information in the appropriate form, depending on the type of dividend and the length of time the dividend has been withheld.



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