Running a small business is one of the most involved careers one can have. Most of the time, you are focused on the day-to-day concerns of running your business, but the financial aspect cannot be ignored. This financial aspect includes taxes. Taxes owed and small business tax deductions you qualify for can profoundly affect your business’s financial health.
First things first, the business structure you have chosen for your small business will significantly affect how you are taxed.
In a sole proprietorship, your personal and business liabilities and assets are not separated for tax-filing purposes. This is the default business classification.
A partnership is a simplified business structure that can be used for businesses run by two or more people.
Limited Liability Company (LLC)
A limited liability company (LLC) is a middle ground between a partnership and a corporation. Members of an LLC have to pay self-employment taxes for Medicare and Social Security.
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If your business is structured as a corporation (C Corp), its activities are separate from shareholders. This protects from liability but requires corporations to pay income tax on their profits, usually at a higher rate. A corporate structure is recommended for larger scale, higher-risk businesses.
In an S corporation (S Corp), some profits and losses can be listed on your and other business owners’ personal income taxes. This allows for lower taxation. However, not all states allow this, and there are many other restrictions that apply to S Corps, such as having a maximum of 100 shareholders.
For tax purposes, an international business is one that is either foreign and conducts business activities within the U.S. or vice-versa. International businesses are required to operate within the Foreign Account Tax Compliance Act (FATCA).
Small Business Taxes
You are responsible for paying both federal and state taxes for your small business’s operations. Small business tax rates can vary from state to state, so it is essential to check with your state’s Department of Revenue. Typical small business taxes include:
Like personal income taxes, some small businesses pay taxes on the net income, with variations depending on business structure.
If you have employees, you are responsible for paying payroll taxes, which include:
Federal Income Tax Withheld from Employees
Federal & State Unemployment Taxes (FUTA & SUTA)
Employer and Employee Social Security and Medicare Taxes
Unlike most taxes, the IRS requires small business owners to make deposited payments for these taxes at least once a month.
If you’re self-employed or a sole proprietorship, you will need self-employment taxes to contribute to your social security and Medicare benefits.
Your business may be required to pay excise taxes on specific activities, sales, or payments. For example, if your company uses truck tractors on public highways or sells lottery tickets, you may be required to pay excise taxes.
Your business may be obligated to collect and pay sales taxes for the goods or services you provide. In addition to federal sales taxes, you may also be required to pay state sales taxes, which can differ depending on the county or city in which you operate.
If your business owns real property, fixed land, and buildings, you’ll have to pay property taxes. Taxes are paid on the assessed value, not the fair market value. The assessed value is determined by the local taxing authority, which will provide you with documentation and a tax bill based on their calculation. The amount you pay in property taxes largely depends on where your real estate is located.
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