Small Business Taxes

+ Employment Taxes

If you have employees, you presumably pay them on a regular basis. It’s up to you to withhold appropriate income taxes (both federal and state) from each check, as well as Medicare and Social Security (FICA) contributions. You’re obligated to match those Medicare and Social Security contributions, so you’ll need to handle that part as well.

Additional deductions for health care benefits, retirement packages, additional investments, union dues, charitable contributions, or other recurring calculations aren’t taxes themselves, but they may impact the amount of tax deducted.

+ Sales Taxes

We’re all familiar with sales taxes, although we don’t focus on them the way we used to when paying cash was more common. (No one wanted to realize at checkout that we didn’t actually have enough to cover what we were buying because we hadn’t allowed enough for sales taxes.) If your small business sells goods or services, you’re probably expected to collect sales taxes.

These are one of the few things not currently collected at a federal level, but don’t worry – in addition to whatever the state demands, many counties have their own sales taxes for which you’re responsible. (You wouldn’t want things to become so simple they got boring, would you?) This means that the way your business sales tax must be computed not only varies from state to state, but often from county to county as well.

Generally you’ll collect and record these at point-of-sale each time. Even if for some reason you choose not to do things that way, your business will be expected to pay the appropriate amount of sales tax based on gross receipts, no matter how they’re computed or whether the customer knowingly paid their portion or not.

+ Excise Taxes

These are less common, but if your business involves specific products or supplies, you may be required to pay specific excise taxes in addition to typical small business taxes. Many are similar to what are sometimes called “sin taxes” – alcohol, tobacco, and gambling usually require specific excise taxes to be paid. Anything related to fuel or other petroleum use, including trucking and some manufacturing, often incurs excise taxes as well.

+ Income Taxes

When you work for someone else, your employer deducts your federal and state income taxes for you. If others work for you as your employees, you’re responsible for deducting their income taxes. When you’re self-employed, with or without employees, you have to pay your own income taxes.

How your business is structured determines what sorts of income taxes you’ll pay and how.

+ Sole Proprietorships

This is a structure in which you are the business and the business is you. You make all of the decisions, you control all of the profits, and you eat any of the losses or liabilities. Taxes for a sole proprietor aren’t dramatically different than what you’re doing as an individual taxpayer already. Your business income is taxed at your personal income rate, the same as if you earned it working for someone else. When the potential profits are all yours, so are potential losses and debts incurred along the way, along with legitimate business expenses, payroll, etc. The paperwork can get complicated rather quickly. If you’re a sole proprietor, you’ll most likely use a form called the “Schedule C” in addition to your standard Form 1040 when it’s time to do your taxes. (Like any other required forms, the Schedule C is generated automatically when you’re using tax software and it realizes you need one.) It’s essentially a worksheet for determining your official profits for the year. You itemize business expenses and allowable deductions and subtract them from your total income. The Schedule C is where you fill in that mileage you’ve been tracking all year, and those lunches with clients, and the cost of office supplies, and that subscription to the industry journals, and so on. It’s important as well to fully identify various forms of business revenue – from sales, service, rentals, investments, and to distinguish between taxable assets and any unrelated business income. It’s easy to overlook important details, which is where the right business tax preparation software or local small business tax services can come in so handy. Sole proprietorships are also responsible for paying self-employment taxes. That means filing a Form SE – one of the rare times the name of government paperwork makes some logical sense. These are essentially the same taxes you’d have deducted from your paycheck if you worked for someone else. They’re currently around 15%, but as with anything managed by a government, the devil is in the details. It sure would be nice to have a versatile, affordable option for simplifying and organizing your small business taxes – something that would remind you of possible deductions for medical expenses or offer tips on minimizing the chances of an audit. Something accessible from your desktop computer, cell phone, tablet, or any other connected device. Unless you actually run a tax preparation business yourself, or you simply enjoy taking hours and hours away from your actual passion to do paperwork and don’t mind paying more than what’s legally required because you overlooked key deductions or completed the wrong box. Either way, small business taxes for sole proprietorships are usually payed quarterly, rather than once a year as with most individual tax returns.

+ Handling Company Income Tax In Partnerships

As the name suggests, partnerships are run by two or more people at the same time. There are different types of partnerships, including that “general partnership,” the “limited partnership,” and the “limited liability partnership.” It’s important to note, however, that within each of these are endless variations. It all comes down to what’s spelled out in the partnership agreement everyone signs. General partnerships are taxed in much the same way as sole proprietorships. They require the same basic paperwork plus a form or two extra, and partners pay self-employment taxes just as if each were a sole proprietor (but only claiming their share of the total income). In a limited partnership, one partner holds more influence than the other(s) and carries the bulk of the liability for any debts or other things. The unlimited liability partner claims business profits as income just like a sole proprietor and pays self-employment taxes. The other partner(s) receive compensation in the form of distributions, which are different from getting a paycheck and have their own tax rules. Since this doesn’t apply to a majority of small business situations, we won’t go into it here. It is doable, however – especially with an affordable and intuitive set of tools for doing your own small business taxes. As we inch closer to actual incorporation, the next structure to consider is a limited liability partnership. Under a general partnership, all partners make decisions and all partners are liable. With a limited partnership, one partner has more decision-making power but is also largely individually liable for the results. In a limited liability partnership, all partners are protected from personal liability. They retain the tax advantages of being sole proprietors but can usually only lose what they have put into the business. Partners will pay self-employment tax as well as quarterly taxes.

+ C Corporation Taxes

The C Corporation structure has an even clearer line between the company as an entity and the individuals running it. This format provides better protection for owners should things go south. C Corporations require more paperwork and C Corporation tax preparation can be rather complex as well. That is, complicated if you’re doing them yourself without the help of local small business tax accountants or quality small business tax filing tools available online through any connected device whenever and wherever proves most convenient for you. Profits from C Corporations are taxed twice – first as business profits and secondly when shareholders file personal tax returns. The double taxation is the reason why many smaller businesses avoid this structure and create LLCs or S-Corporations instead, if practical to do so. Employees of C-Corporations are subject to withholding and do have to pay income tax just like everyone else. Stockholders are also required to report income from dividends separately.

+ S Corporation Taxes

Most of what we’ve talked about so far are business structures that impact how taxes are paid. The S Corporation isn’t a distinct type of business structure, but a specific way to manage small business taxes. Under an S Corporation structure, profits are taxed only as income – much like they are for sole proprietors or general partners. Those participating are responsible for self-employment taxes. The S Corporation retains the protections of a C Corporation with limiting personal liability for business losses. Because there are clearly numerous advantages to this set-up, the S Corporation comes with its own set of requirements and limitations which you can explore in more detail should you choose.