A beginner’s guide to small business taxes
The definition of business tax is simple: it’s the taxation on a business’s income. The way that small businesses are taxed differs from larger corporations. The structure of the business you operate determines the type of taxes you must pay and how to pay them. There are five main business structures:
It’s important to file taxes because it shows that your business is responsible and it prevents you from getting audited and it can act as proof that you aren’t committing tax fraud.
Filing business taxes
There are five general types of taxes for businesses: income, estimated, self-employment, employment, and excise. Before filing your taxes, be aware of the type of business you run in order to determine which tax type to file under.
Income tax is a type of tax that the government imposes on income that is generated by a business or individual. For most people, this is a pay-as-you-go tax, though in some cases it ends up being a lump sum due at filing.
All businesses, except those that are a partnership, must pay income tax. When you first start a business, particularly when it’s an LLC, how you elected to have it treated for tax purposes (either as a corporation, partnership, or as part of the LLC owner’s tax return) will determine what taxes must be paid and which forms to fill out.
According to the IRS, someone might make estimated tax payments if the amount of income tax withheld from their paychecks is not enough, or if they receive income such as interest, dividends, alimony, self-employment income, capital gains, or prizes and awards. Estimated taxes are used to pay not just income tax, but self-employment and alternative minimum tax as well.
Those who typically have to pay estimated taxes are:
- Sole proprietors;
- S corporation shareholders;
- Corporations (only if they are expected to owe tax of $500 or more when their return is filed).
However, you don’t have to pay estimated taxes if you meet all three of the following conditions:
- You had no tax liability for the prior year;
- You were a U.S citizen/resident for the whole year;
- Your prior tax year covered a 12 month period.
Small businesses like online retailers or web stores can integrate their e-commerce platforms with their accounting software to make tracking revenue and calculating estimated taxes faster and easier. Moreover, having integrated records in the event of an audit can make that process faster and painless.
Using records of income, deductions, and credits from the prior year can help assess how much your estimated tax may be for the current year.
Self-employment (SE) tax is a tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves. The self-employment tax rate contains two separate parts: 12.4% for social security and 2.9% for Medicare, making a combined total of 15.3%.
Usually, to calculate and pay their estimated SE tax, employees will need to fill out and file Schedule SE (Form 1040) if either of the following applies to them:
- Their net earnings from self-employment (excluding church employee income) were $400 or more.
- If they are a church employee and their income is $108.28 or higher.
In order to pay a self-employment tax, you must have a Social Security Number or an individual taxpayer identification number.
Employment taxes are various types of taxes, such as federal income tax, social security, Medicare taxes, and Federal Unemployment taxes, that need to be deposited and reported. It is the employer’s responsibility to pay the taxes and file any necessary forms for their employees.
Federal income taxes that have been withheld, along with employee Social Security and Medicare taxes, must be deposited. Employees must also report their taxes that had been deposited, as well as their wages, tips, and other compensation that were paid to them.
Depositing employment taxes is the requirement for an employer to deposit federal income taxes withheld through the Electronic Federal Tax Payment System (EFTPS). There are two different times to deposit, either semi-weekly or monthly. It is up to the employer to decide which depositing schedule they would like to follow.
Excise taxes are taxes that are paid when purchases are made on a specific good, such as gasoline, and are often included in the price of the product. Other business activities that require this tax are:
- The manufacturing or selling of certain products;
- Operating certain kinds of businesses;
- Usage of various kinds of equipment, facilities, or products;
- Receiving payment for certain services.
Use Form 720 to pay on the following categories:
- Environmental taxes;
- Communications and air transportation taxes;
- Fuel taxes;
- Tax on the first retail sale of heavy trucks, trailers, and tractors;
- Manufacturers taxes on the sale or use of a variety of different articles.
Use Form 2290 to report on items such as certain trucks, truck tractors, and buses that are used on public highways. The excise tax also applies to vehicles that have a taxable gross weight of 55,000 pounds or more.
Form 730 is used by those who are in the business of accepting wagers or conducting a wagering pool or lottery, which may be liable for the federal excise tax on wagering.
Finally, Form 11-C is the form that is used by principals or agents who accept taxable wagers to help them:
- Register certain information with the IRS.
- Pay the occupational tax on wagering.
Small business tax rate
Small businesses tax rates differ from larger corporations’ rates by being associated with pass-through entities, meaning they pay taxes at individual rates and the owners report business income on their personal taxes. In fact, 75% of small businesses are pass-through entities.
Since few small businesses have administrative specialists, a lot of the tasks fall upon the owners resulting in 89% of business owners relying on outside help for tax preparation. However, companies using solutions that integrate e-commerce software with other business software solutions, organizing accounting records such as sales and tax reports that may help to relieve the extra work off of the owner.
Pass-through businesses are not affected by corporate tax rates, yet are susceptible to individual tax rates.
Small business tax deductions
Aside from paying the correct amount, record-keeping is invaluable when it comes to maximizing deductions to limit taxes owed. A robust, integrated invoicing solution is essential to managing client billing and payments, but even the most accurate recordkeeping can’t prevent bad debts from cropping up. As such, being able to deduct bad debts from business taxes can be an especially important consideration for B2B companies. It can be common for small businesses — especially B2B — to get overwhelmed with record-keeping, possibly leading to workplace transaction receipts getting lost, delinquent accounts, and unpaid invoices. Here are a few other items small businesses can claim as deductions:
- Company vehicle expenses;
- Home offices;
- Professional services;
- Work opportunity tax credit;
- Office supplies/expenses;
- Client/employee entertainment;
- Computer software;
- Travel expenses;
When are business taxes due?
For most, taxes are due no later than April 15. However, since small businesses pay towards their taxes throughout the year, there are different due dates depending on how the owner decided to run their business (either monthly or bi-weekly).