As a business owner, you’ll be responsible for your individual income tax based on how much profit you make and filing returns and paying taxes, depending on your company’s legal structure. But, no matter the size of your business, keeping track of all your spending is crucial—and it all starts in dealing with taxes.
The kind of business you’re running will affect the type of taxes you’ll be responsible for. However, before paying for your taxes, hire a lawyer for tax exemption rules to help you determine if you can get any taxes deducted for your particular business. An accountant may also help you keep track of everything, streamlining the process.
With that said, here are the different kinds of taxes businesses face.
The Internal Revenue Service (IRS) requires all companies except a business partnership to file an income tax return every year. Meanwhile, businesses paying estimated taxes can pay them while filing for federal income tax returns. Additionally, some states require business owners to pay income tax depending on the legal structure.
The IRS provides self-employment taxes in contributing to social security or insurance for a person working for themselves. Some taxpayers find this tax to be beneficial. That’s because the coverage offers them several benefits for retirement, disability, and hospital insurance. Self-employment taxes usually take 15.3%, while 12.4% of it goes to Social Security.
IRS defines a self-employed individual as someone carrying on a trade or business as an independent contractor or sole proprietor. They can also be members of a partnership carrying on a trade or business.
Employers need to pay employment taxes, covering Social Security and insurance, federal income tax withholding, and federal unemployment taxes for their workers. Business owners need to cover at least half of Social Security and Medicare expenses out of their personal pockets and deduct the other half from the employees’ paychecks. However, regarding the federal unemployment tax, employers need to cover all its costs.
Some states also require some businesses with a set number of employees to pay state employment taxes covering workers’ compensation and unemployment insurance.
The federal government requires some businesses to pay excise taxes, depending on what the company’s selling, manufacturing, operating, and whether they’re receiving payments for particular services. These may include but aren’t limited to environmental taxes, fuel taxes, communications, or air transportation taxes.
Income taxes in the United States are often pay-as-you-go, meaning if you don’t have taxes automatically withheld from your income by your employers, you’re responsible for paying estimated taxes on your profit, interests, dividends, alimonies, rent, and prizes or awards. People who need to pay estimated taxes include anyone self-employed, a sole proprietor, a partnership, and S corporation shareholders.
Besides paying taxes, the federal government requires, expect your state and local governments to provide their different demands. Like federal taxes, your business’s legal structure will dictate how much you’re paying for state taxes. However, most states only usually require payments toward unemployment taxes and workers’ compensation policy. Meanwhile, other states like California and New York mandate contributions for temporary disability insurance.
If you have businesses in several states, you need to pay separate taxes for each of them, including income and sales tax. Plus, the different tax requirements that each state requires.
The IRS requires all businesses, no matter the size, to pay federal taxes, including income, self-employment, employment, and excise tax—and additional taxes given by localities. Keeping up with all these is crucial in running a company, so if you’re considering establishing a startup, consider working with an accountant to stay ahead and allow you to focus on more important things.