New small business owners often find it difficult to determine which taxes they are required to pay and when. Since the responsibility of correctly filing and paying taxes for a business and its employees rests solely with the business owner, knowledge about taxes becomes crucial for a new small business owner. Even though a return preparer may be hired to handle the tax responsibilities, it is important for the business owner to be aware of the fundamental tax obligations that a small business is required to meet.
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Taxes differ from business to business based on their business structure and location. Depending upon the structure of a company (Sole proprietor, partnership, corporation, etc.) and the state in which it operates, business taxes may differ.
Typically, there are five types of business taxes:
- Income tax
- Self-employment tax
- Estimated tax
- Employer tax
- Excise tax
Usually, the two most common federal taxes small businesses need to pay are income tax and employment tax.
Small business income taxes
All businesses are required to file a tax return. Most small businesses need to pay taxes on the income earned or received during a tax year. However, in a partnership, each partner reports their share of the profit/loss on their individual tax return while the company only files an information return annually. A small business may also be required to file an information return.
Income tax is a pay-as-you-go tax, which means that income tax is paid as income is earned/received during the year. To know which income tax return form you need to use to file your income tax according to the structure of your business, visit IRS Business Structure.
Employment taxes for businesses
Small businesses that have employees are required to withhold taxes from their employee’s pay. Usually, employers need to withhold federal income tax, part of social security tax, Medicare tax, unemployment insurance taxes, etc. from their employee’s pay. Some of these taxes may vary by state.
Federal unemployment tax (FUTA) is also the employer’s responsibility. Most employers pay both a federal and a state unemployment tax. FUTA provides funds for paying unemployment compensation to workers who have lost their jobs.
Those who work for themselves need to pay self-employment tax, which is a Social Security and Medicare tax. Self-employment tax only refers to these two taxes – Social Security and Medicare – and does not include other taxes that a self-employed person may owe. To figure out self-employment tax, taxpayers may use Schedule SE (Form 1040 or 1040-SR).
Estimated tax payments
Business owners or individual taxpayers can use estimated tax payments if they are not withholding taxes. In other words, estimated tax can be paid on any income that is not subject to withholding, such as earnings from self-employment, interest, rent, alimony, dividends, and so on. Sole proprietors, partners, and S corporation shareholders generally use Form 1040-ES to find out how much to pay in estimated taxes.
A small business may need to pay state and local taxes as well. State taxes vary with the business structure. For instance, sole proprietors have different tax obligations than corporations. A business owner may check the specific tax obligations for their state on this IRS page – State Government Websites – which lists state government websites for all states. It contains information on doing business in the state, taxation, etc.
E-filing employment tax forms
Small business owners can e-file these employment tax forms – 940, 941, 943, 944, and 945. They can either submit the form themselves or find a tax professional to file the forms by using the Authorized IRS e-file Provider Locator Service available for individuals and businesses on the IRS website.
Though tax laws seem complicated, help is readily available. There are many online resources offering comprehensive information, tools, and tax software that new business owners can use to understand and fulfill their tax obligations.
Tax issues happen when you’re a small business owner. If you’re having challenges, we can help.
Article last modified on January 12, 2023. Published by Debt.com, LLC