Explaining Your Small Business Taxes

Now that you’ve running your own small business, work doesn’t feel like work anymore since you’re doing what you love! However, we’re sure that feeling will slowly fade when you start filling out your small business taxes. Don’t worry, we’re here to make this process easier for you! Reading through this article will greatly prepare you for the approaching tax season!

Look, life happens. There’s not enough hours in the day as you’re running your growing small business. Please, hire a business accountant if you need help with your taxes. Make sure you thoroughly research, from looking at referrals to consider working with a CPA. Due to the COVID-19 epidemic, schedule a video meeting or phone call with your business accountant.

Explaining your small business taxes:

Your business taxes are broken down into three levels: federal, state, and local. Of course, your federal taxes are the largest part of your tax burden as the IRS collects them. On the other hand, state and local taxes change from state to state and municipal to municipal, so you should consult your state and local tax agencies to learn more about these business tax obligations.

Here are seven types of business taxes you might need to pay:

• Income tax: The tax you must pay on the income your business earns.

• Self-employment tax: This tax covers social security and Medicare taxes.

• Employment tax: You deduct this tax from employee paychecks for federal income taxes, social security taxes, Medicare taxes, and federal unemployment taxes.

• Sales tax: In the United States, there are 45 states, along with Washington D.C. and Puerto Rico, that have their own versions of sales tax. You are responsible for paying this tax when you sell goods and services to your customers.

• Excise tax: Tax you pay if your business is involved in certain goods or services, such as air transportation, fuel, or heavy trucks and tractors.

• Property tax: Tax you pay for commercial property, land, or real estate your business owns. This tax is regulated on the local level based on where your business is located.

• Estimated tax: You must pay quarterly estimated tax payments if you expect to owe tax of $1,000 or more. Corporations generally make estimated tax payments if they are expecting to owe $500 or more when their tax return is filed.

Explaining taxes for sole proprietors:

Sole proprietorship is a business that’s owned and operated by one individual. Here, you would report your business income and losses on your personal tax income return. You’re also responsible for covering your self-employment tax and quarterly estimated taxes. Generally, you would file a Schedule C along with your Form 1040.

Explaining taxes for partnerships:

Partnerships are business ran by two or more partners. There are three types of partnerships: general, limited, and limited liability. Here, business owners must pay income taxes, self-employment taxes, and quarterly estimated taxes.

Operating a partnership means the business must file a Form 1065, an annual information return that shows income, deductions, gains, and losses. With partnerships, the business isn’t responsible for paying income tax as “pass-through taxation” prevents business owners from facing corporate tax rates. Each business owner must file their respective shares of income and losses on their personal tax return, which are always shown on their Schedule K-1.

Explaining taxes for C corporations:

If your business is a C corporation, your business is legally separate from you as the owner. However, C corporations face “double taxation” and must pay the flat income tax rate of 21%. Shareholders are also taxed on their personal tax returns when profits are distributed as dividends.

C corporations must file using Form 1120. Business owners can save on their self-employment taxes by paying themselves a smaller salary and taking more money from the company in distributions. However, the IRS has caught on to this and requires you to pay yourself a reasonable salary due to your title, industry, and qualifications. Dividends are also subjected to a dividend-specific tax rate.

Explaining taxes for S corporations:

With S corporations, they’re treated as pass-through entities for tax purposes, meaning shareholders must report their business income and losses on their personal tax return, and their profits are taxed at the personal income tax rate. S corporations file Form 1120s, an informational tax return, but the business doesn’t pay corporate taxes and avoids doble taxation.

Owners must pay quarterly estimated taxes if they expect to owe $500 or more in taxes. Shareholders are also required to make estimated tax payments if they expecting to owe $1,000 or more.

Explaining taxes for limited liability companies:

This business entity keeps owners legally separated from the company’s debts or liabilities. Instead, you experience the tax benefits of a sole proprietorship or partnership. You won’t be subjected to double taxation as you make quarterly tax payments on your personal income tax form. Each year, you’ll need to submit Form 1065 for informational purposes.

References:

“Estimated Taxes.” IRS, 25 Nov. 2020.

McIntyre, Georgia. “The Complete Guide to Filing and Paying Small Business Taxes.”

Fundera, 28 Oct. 2020.