Americans spent about 8.9 billion hours on IRS tax compliance. It cost about $409 billion to comply with the tax requirements.
Small businesses bear a lot of that burden. They don’t have a team of lawyers looking at tax loopholes. Most choose to save money and try to figure it out for themselves.
They’re then surprised by how many types of taxes they have to pay. It’s not just federal taxes, but you might end up paying a dozen different taxes, depending on your business.
Knowing what these taxes are is the starting point for saving money on taxes. Ready to learn more?
Read this guide to learn what the most common business taxes are and get some tips to help you save money when filing taxes.
1. Federal Income Tax
The IRS requires all individuals and businesses to file income tax returns. Most business owners report their business income on their personal income tax returns by using Form Schedule C.
Partnerships are exempt from filing income taxes. That’s because owners take a distribution of profits, which then get reported on the owners’ personal income tax returns.
2. State Income Tax
You may have to pay state income taxes depending on where you live. Florida, Texas, Washington, Nevada, Tennessee, Wyoming, Alaska, and South Dakota are the states that don’t have a state income tax.
These states still have a business income tax or a gross receipts tax. A gross receipts tax is a tax rate based on business income, not profit.
3. Self-Employment Tax
Social Security and Medicare get funded through payroll deductions. Employers withhold 6.2% for Social Security and 1.45% for Medicare.
Employers match these contributions. Self-employed people don’t have an employer to withhold and match their contributions.
Self-employed people have to pay the entire 15.3%, which is known as the self-employed tax. This is based on your net business income, not gross income.
4. Sales Tax
This is a very complicated area of tax law because of ecommerce and each state has its own set of sales tax requirements. A retailer with a single location charges a percentage of sales in sales taxes to consumers.
They collect the money and send it to the state on a monthly or quarterly basis. An ecommerce business might be responsible for collecting and paying sales taxes in multiple states.
This is where it pays to get an accountant that works with ecommerce companies.
5. Payroll Tax
Employers have to pay payroll taxes. This is the amount withheld for Social Security and Medicare, which you match.
It’s very important to have an accurate payroll tax return. Don’t misclassify employees as independent contractors. Pay payroll taxes on time.
The IRS is cracking down on companies that file inaccurate payroll taxes. You could face harsh fines and penalties.
6. Excise Tax
An excise tax is similar to a sales tax. It’s assessed at the point of sale, but it’s only for certain types of goods.
Fuel, firearms, alcohol, tobacco, and air travel are a few examples of goods that have an excise tax. The business is responsible for the excise tax, but they usually add this to the cost of the product or service.
7. Property Tax
If your business owns property, then you’ll have to pay property taxes. This is assessed by the local government.
The good news is that you can deduct property taxes from your federal and state income tax returns since it’s a business expense.
8. Estimated Taxes
Self-employed individuals and businesses that owe more than $1000 in federal taxes have to pay estimated quarterly taxes. You also have to pay estimated taxes in most states.
This is based on your previous year’s filings. For example, if you paid $4000 in taxes the previous year, you pay $1000 each quarter.
This assumes that your revenue stays the same. If you earn more money, you should adjust your estimated payments so you don’t end up with a large tax bill.
Tips for Filing Taxes
What can you do to make filing taxes easier? Make sure you have the correct corporate structure for your business. You might have an LLC, but it might be better if you’re taxed as an S-Corp.
Know the tax filing deadlines. Each type of tax has its own deadline. Then you have to note the differences between federal tax deadlines and state deadlines.
Tax deadlines don’t have a grace period. The IRS starts to assess interest and penalties for payments that are a day late.
The next thing you need to do is find a reputable CPA to file taxes on your behalf. CPAs stay up to date on tax laws and can represent your interests in front of the IRS.
If saving money on taxes is important to you, it’s best to work with a CPA that understands the tax deductions you’re eligible for.
It’s possible to outsource tax prep with Taxfyle. They have a roster of CPAs with experience across different industries. You’re matched with a CPA that is the best fit for your business.
It’s up to small business owners to maintain good records. Make sure you keep your receipts, invoices, and business records for about seven years.
Stay on top of your records by setting aside a little bit of time to scan and organize your receipts each month. This level of organization makes tax time that much easier.
The Types of Taxes for Small Businesses
Small businesses have a higher tax burden because they have to pay different types of taxes. It’s also up to small businesses owners to figure it out on their own.
Some of the types of taxes include estimated taxes, federal income, state income, self-employment, and sales taxes. There are additional taxes if you have employees.
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