Taxes on business are more complicated than individual income tax returns, as there are both local and state taxes to contend with, as well as federal income taxes that must be paid.
Maintaining up-to-date tax codes is an integral component of running any successful business, yet can be an immense source of frustration for a busy entrepreneur.
1. Know Your Exemptions
Most people immediately associate “business taxes” with federal income tax obligations; however, small businesses may also need to pay different kinds of business taxes.
States tax tangible property or sales taxes while others levy local income taxes. Furthermore, businesses often must withhold and report payroll taxes such as Social Security and Medicare from employee paychecks before reporting the taxes as required by state regulations.
Your business tax rates depend upon the type of entity and filing status chosen with the IRS. C corporations pay taxes at both levels; pass-through entities like sole proprietorships and partnerships must report their taxable income via individual returns; as well as some states having gross receipts taxes while others levy sales and excise taxes.
2. Know Your Tax Rates
People tend to focus on federal income tax rates when discussing small business taxes; however, other taxes that small businesses must pay may include sales tax rates or payroll taxes.
As an owner of a C corporation, you may be required to pay tax at 21%; pass-through entities (sole proprietorships, partnerships and LLCs) however are taxed at their owners’ personal income tax rates which range between 10%-37%.
Further, many states and localities impose sales taxes that apply to various goods and services purchased, while property taxes may apply to any buildings or land owned by businesses. It’s essential that you know about all the available tax rates so that you can accurately plan for expenses when running your own small business.
3. Know Your Tax Options
Your choice of business structure will have an enormous effect on the taxes you owe, so consider all possible strategies carefully to minimize tax avoidance or evasion schemes.
Example: Using personal bank accounts or undesignated credit cards for business expenses could raise red flags with the IRS, so make sure your personal and business expenses remain separate to avoid this potential problem.
Additional taxes to keep an eye out for include state income and sales taxes, property tax and unemployment tax. Furthermore, quarterly estimated payments may also need to be made. An accountant or qualified tax professional is your best resource when it comes to meeting these responsibilities; they can help plan ahead and reduce your tax liabilities.
4. Determine Your Classification
Classifying your business properly has an enormous effect on how much taxes are owed; for example, corporations are considered separate legal entities from their owners or shareholders for tax purposes, while sole proprietorships and certain LLCs do not.
Sole proprietors report business profits and expenses on Schedule C, which must be filed along with individual income tax returns. Partners of general partnerships or LLPs share management responsibilities but aren’t considered distinct legal entities for federal tax purposes, so profits and losses are reported directly on individual tax returns.
Many types of businesses must pay property and sales taxes. To learn more about them – including rates and requirements in each state – visit this IRS page.
5. Make Sure You’re Compliant
As a small business owner, it’s crucial that you comply with tax laws and regulations. This means determining the ideal business structure and filing requirements as well as keeping an eye out for potential tax advantages or traps.
Your business structure determines which information returns need to be filed and may have state income or franchise taxes due. Sales tax must also be recorded and collected from customers as well as local property taxes where applicable. Payment dates vary based on business structures as well as when holidays and weekends fall; working with an experienced tax attorney is key for avoiding costly mistakes and penalties.