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One of the most important considerations of starting and running a business is paying taxes to local, state, and federal governments. As a business owner, you need to be familiar with the types of taxes you are obligated to pay and the tax laws that apply to your company. Planning and accounting for taxes are important parts of managing your company’s finances and keeping track of your cash flow.
No one wants unpleasant tax surprises at the end of the year. Unfortunately, there are several different types of taxes that affect small businesses in the U.S., so it can be difficult to keep track. Many small business owners aren’t sure what they’re supposed to be paying, or why they’re required to pay it. This guide will help.
The 5 Types of Business Taxes That Might Affect You
The following five types of taxes often apply to small businesses:
1. Income Tax
According to the IRS, income tax affects all businesses, except for partnerships. You pay your Income tax gradually - as your business makes income. If you do not pay estimated income taxes throughout the year, you’ll have to pay all tax due at the end of the year when you file your returns.
2. Self-Employment Tax
Self-employment tax is a Medicare and social security tax that affects people who are self-employed in the U.S. The money you pay into self-employment taxes ensures you earn coverage under the U.S.’s social security system and that you get the retirement benefits, survivor benefits, disability benefits, and hospital insurance benefits you deserve.
You’ll pay self-employment taxes if your self-employed income exceeds $400 a year.
3. Estimated Tax
Estimated tax is tax paid on income and self-employment tax, both of which are based on your income. You make payments on this tax throughout the year.
4. Employment Taxes
If you are an employer, you will have to pay employment taxes for the people who work for you. Employment taxes include Medicare and social security taxes. They also include federal unemployment taxes and federal income tax withholdings. The laws surrounding employment taxes may vary from state to state, so it’s important to find out which ones apply to your company.
5. Excise Tax
If you manufacture and sell certain types of products, operate a particular kind of business, use certain equipment, products, or facilities, or get payments for certain services, you may have to pay excise tax. The price of a product typically includes these taxes. You can learn more about whether or not these taxes apply to you here.
What is Sales Tax?
In addition to the taxes mentioned above, business owners must also consider sales tax. Companies and consumers pay sales tax to governing bodies for the sale of a specific good or service. This tax is typically collected from a consumer by a vendor at the point of purchase. In some cases, governing bodies use sales tax to tax personal property, wholesale products, and retail products.
What are the Most Common Tax Liability Issues?
As you start and run your business, there are a couple tax liability issues that you and your accounting professionals will need to navigate:
- Income Tax Liability Issues. If you run your business as a sole proprietor, you’ll start out by using a Schedule C to report your company’s activities. As a sole proprietor, you’ll pay business taxes, including income tax on all your business income. You’ll also pay social security tax on the income you make. While many new small business owners don’t expect to pay social security tax, which can be about 15% of annual net income, there are few ways to get around this. Even if you run your business as a partnership or LLC, you’ll still have to pay self-employment tax. If you want to reduce your tax liability at the end of the year, you can work with an accountant to set up estimated tax payments. These will decrease your end-of-the-year tax bill and help you avoid penalties.
- Payroll Taxes. Payroll taxes are some of the most common taxes paid by a business. If you have employees, you’ll need to work with an accountant to get the payroll numbers you need. To pay payroll taxes, you’ll need a FEIN, or a “Federal Employer Identification Number," which you can obtain by checking with your local tax professional. Depending on what state you’re in, you may also need to pay local and state taxes.
The Importance of a Tax Professional
If you run a small business in the U.S., there are dozens of business taxes and laws to be aware of. The best way to ensure you understand them all is to enlist the help of a professional. A tax professional can help you determine which laws apply to you, and what you’ll need to do to comply with them.
When you hire a skilled tax professional, you’ll have a simpler time filing your tax returns, employment tax returns, and unemployment returns and payments.
To get on top of your taxes this year, make a list of your potential tax liabilities and sign up for MOBI’s “ Start a Business Course .” This information will be helpful when you are writing Section 11 of the MOBI Business Plan Template.