Business Taxes ‘Simplified’

What Is a Business Tax?

The taxes you pay and how you pay them depend on how you set up your business, but there are three general types of business taxes.

1. Income Taxes

All businesses have to file an annual income tax return. C corporations pay income tax at the corporate rate, while all other businesses are considered “pass-through” entities and are taxed at the individual rate (we’ll dig in on these in a minute).

2. Estimated Taxes

Freelancers, independent contractors and small business owners who expect to owe at least $1,000 in taxes need to estimate and pay quarterly taxes. If you don’t pay them, or don’t pay enough, you can be hit with penalties and interest, and open yourself up to all kinds of unpleasantness. So you need to be sure that you know the due dates and the payment period for the estimate.

3. Employment Taxes

People who are self-employed have to pay self-employment taxes, which are Social Security and Medicare taxes.

You have to pay self-employment taxes if:

• Your net earnings are $400 or more

• You work for a church or a qualified church-controlled organization that elected an exemption from Social Security and Medicare taxes, and you make $108.28 or more in wages. This does not apply to ministers or members of a religious order (such as nuns).

If you have employees, you have to pay employment taxes, which include:

• Social Security and Medicare taxes

• Federal income tax withholdings (this is technically paid by your employee, but you’re responsible for making sure Uncle Sam gets it)

• Federal unemployment (FUTA) tax

There are also various excise taxes depending on the type of business. Often called sin taxes, these could be anything from taxes on purchasing heavy-duty trucks to sales of alcohol and tobacco.

Pass-Through Entities

The tax rate for pass-through entities is the same as the owner’s personal income tax rate. There is also an alternative minimum tax (AMT). The AMT only applies to certain high-income earners who may otherwise avoid paying any individual income taxes.

So, which types of businesses are pass-through entities?    

• Sole Proprietorship: A business where you are the only owner. You are the boss and totally responsible for everything that happens. It’s really important to keep your personal finances and business finances separate so you don’t get into any tax trouble.

• Partnership (Limited and Limited Liability): A business owned by two or more people. Limited partnerships (LPs) have a greater potential for personal conflict between the partners, since only one of the partners has unlimited liability—meaning they’re on the hook for any debts or bills if the business goes belly-up. The partners with limited liability also tend to have limited control of the business. In a limited liability partnership (LLP), however, all partners are protected from debts and obligations against the partnership.
  

• Limited Liability Company (LLC): LLCs help separate personal assets and liabilities from business ones, reducing your personal risk if your business is unable to pay its bills. In an LLC, your profits and losses can pass through to your personal income without facing corporate taxes, but members of an LLC are considered self-employed and must pay self-employment taxes.

• S Corporation: An S corporation is structured to avoid the double taxation that happens in a C corporation. S corporations allow profits, and some losses, to pass directly through to the owners’ personal income without being subject to corporate tax rates. But there are some limits to S corporations: You can’t have more than 100 shareholders, and all shareholders must be U.S. citizens. Plus, S corporations still have to follow strict filing and operational processes.

State and Local Taxes on Businesses

Depending on where you live, you may also have to pay state and local taxes. The types and amounts of taxes you’ll pay are different depending on your location. This is where a tax pro can really come in handy. Our small-business tax Endorsed Local Providers (ELPs) focus on the local. They live in your community and can guide you through complex state, county or city tax laws.

There are three big state and local taxes to be aware of:            

• State income taxes: Unless you live in one of the states that doesn’t have them, you will owe state income taxes.

• Property taxes: If you own commercial property, you will have to pay property taxes, which are typically assessed at the county or city level.
  

• Sales taxes: If you sell things, you’ll be responsible for collecting sales taxes. If you sell things online, this can get complicated, because some states charge based on where the seller is located, while other states charge taxes based on where the buyer is located.

Someone Who Can Help You With Your Taxes

We don’t have to tell you that business taxes can be a hassle. We do have a few Tax Professionals we recommend. Contact us and we will be sure to connect you.