It’s that time of year again. People across the country are scrambling to file their taxes before the fast-approaching deadline. For many small business owners, it’s one of the most frustrating and confusing business tasks they do all year, especially if they aren’t fortunate enough to hire an accountant to do the dirty work. Small business taxes don’t have to be a nightmare, though. Whether you’re a sole proprietor or a corporation, a few tax tips can go a long way toward making tax preparation a little less scary.
Understand the Different Types of Small Business Taxes
Whether you have a sole proprietorship, partnership, or corporation, the IRS should have issued your business an Employer Identification Number (EIN). In general, an EIN is necessary for established businesses with employees (including yourself) to file their tax returns for employment taxes. If you don’t have an EIN yet, you can apply for one online or via the phone.
Small businesses have several types of taxes they may need to pay to the government, but not all businesses will have the same requirements. The most common taxes are:
- Income Tax – This tax is levied against your business’s net profit. City, state, and federal governments may charge income tax. You’ll need to show your net profit on your personal income tax forms if you operate a sole proprietorship, partnership, limited liability company (LLC), or certain types of corporations. Other types of corporations may instead pay corporate income tax.
- Employment Tax – These are taxes on the costs of employing other people. You may have to pay some employment taxes while your employee may pay others from their paycheck. In general, employees pay federal and state withholding taxes and Social Security and Medicare taxes. Meanwhile, employers will match an employee’s Social Security and Medicare taxes and pay unemployment insurance and state disability taxes.
- Self-Employment Tax – If you work for yourself, are an independent contractor, or are a sole proprietor, the IRS will likely classify you as “self-employed.” Self-Employment Tax is a combination of Medicare and Social Security taxes.
- Excise Tax – This tax is unusual, but still relevant if your business manufactures or sells certain products or operates heavy machinery.
- Sales Tax – This is a state-regulated tax. Depending on the state in which you operate your business, you may not be required to pay sales tax at all.
- Local Tax – These taxes are regulated by the city and county you operate in and can include things like property taxes, permit taxes, and more.
Know Your Federal Obligations
Federal business taxes are typically the most numerous and complex, especially since tax percentages or policies can change year-to-year. An accountant or tax professional can help you navigate your tax obligations. On the whole, though, you’ll likely pay income tax, employment tax or self-employment tax, and excise tax to the IRS.
When organizing your federal taxes, you’ll need to keep accurate records of your business expenses (like invoices, receipts, etc.) on hand to deduct from your federal income taxes. You may also be eligible for tax deductions or tax credits from the United States government, but these often require additional forms to claim them. Business taxes are typically not filed yearly like personal taxes are, though. Some may be annual; others may be quarterly or monthly. The IRS provides a calendar online with their schedule of tax filing.
Research Your State Obligations
State tax obligations can include state income taxes, permit or license taxes, fictitious name permits, and sales taxes. These fluctuate depending on the state in which you operate your business. Research your state’s taxes to ensure you aren’t slapped with a penalty later on.
You could also be eligible for tax breaks that make it cheaper to do business in one state than another. Your state taxes will likely be paid to the state department of revenue. It’s always prudent to double check where you send your money to ensure your obligations are paid on time, though.
Keep That Tax Money in the Bank
Unlike when you worked for an employer yourself, the government doesn’t simply deduct your taxes from your paycheck. You need to set that tax money aside for paying your taxes when they’re due. That’s right. You pay one lump sum annually, quarterly, or monthly. If you end up short on taxes, that could spell trouble for your business.
Open a separate account specifically for your tax obligations and pay into it every week or month. This will keep you current on all your taxes with less stress when it’s time to pay.
Business Formation Document Services in the Inland Empire
Think you’ve got the information you need to feel ready to open your own business? ProSe Legal would love to help. Our experienced legal document assistants can assist you with organizing, completing, and filing all your business formation documents – whether you’re opening a sole proprietorship or a corporation. We can help complete the documentation needed to establish your business entity with the state and secure an EIN for you with our convenient business formation package services.
If you’re ready to become an entrepreneur, get the ProSe Advantage.
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