Business Income Tax | What to Know for Small Business
Business Income Tax | What to Know for Small Business

Business Income Tax | What to Know for Small Business

Unlike individual income tax, most small business owners and entrepreneurs must pay business income tax. Some businesses are required to pay self-employment tax. This is generally reserved for those who are self-employed.

Also, you may be required to pay estimated quarterly tax payments. These payments are due depending on the type of business you operate and how much you earn during the tax year.

Of course, it is recommended that you work with a qualified tax accountant when dealing with business income tax as they are most qualified to advise you in these matters.

How Does Business Income Tax Work?

According to the IRS, all businesses must file an annual income tax return except partnerships. Partnerships are required to file an information tax return. The IRS form you use to file your business income tax return depends on how your business is organized.

Federal income tax is a tax that you pay as you earn it. You are required to pay the tax on the income you earn or receive during the tax year. Employees typically have income tax withheld from their paychecks.

What Else Do I Need to Know?

The IRS explains that the income tax return you must file for your business is based on how your business entity has been established.

If you don’t pay your income tax by withholding taxes from your paycheck, or if you don’t pay enough tax like that, you may need to pay quarterly estimated tax payments throughout the tax year. If you aren’t required to pay quarterly estimated taxes as a business owner or entrepreneur, you can pay any taxes you need to pay when you file your annual tax return.

What Other Taxes Will My Business Be Responsible For?

Self-Employment Tax

According to the IRS, self-employment tax combines social security and Medicare taxes. It is typically reserved for those who work for themselves, people who are self-employed. If you must pay self-employment tax, you are contributing to your coverage of social security. Social security coverage provides you with many benefits, such as retirement benefits, survivor benefits, disability benefits, and hospital insurance or Medicare benefits.

The IRS further explains that you may need to pay self-employment tax and file Schedule SE with IRS Form 1040 or IRS Form 1040-SR if the following apply to you:

  • You have earned $400 or more from being self-employed. Determine how much your net earnings are to figure this amount.
  • You worked for a church or qualified church organization during the tax year that elected an exemption from social security and Medicare taxes and earned $108.28 or more in wages from said church or qualified church organization.

There are exceptions and rules for fishing crew members, aliens, notary public, state or local government employees, foreign government, or international organization employees. Read more about self-employment tax by referring to the IRS page for Self-Employment (Social Security and Medicare).

Employment Taxes

According to the IRS, if you have employees, as an employer, you are responsible for certain tax obligations that you must pay and certain forms that you must file. Employment taxes include:

  • Social Security and Medicare Taxes
  • Federal Income Tax Withholding
  • Federal Unemployment Tax (FUTA)

For more information on employment taxes, check out the IRS page for small businesses about employment taxes. The IRS has a page for small businesses called Employment Tax.

Excise Tax

The IRS further explains that you may be required to pay excise tax as a small business owner if the following applies to you:

  • Make or sell certain products
  • Operate certain kinds of businesses
  • Use various kinds of facilities, equipment, or products
  • Receive payment for certain services.

For more information on excise tax, refer to the IRS page on Excise Tax.

Frequently Asked Questions

What is business income?

Business income is the net profit or loss you realize as a business. Investopedia defines it as a type of earned income classified as ordinary income for tax purposes. It involves any income realized as a result of the operations of your business. It is calculated by taking the total revenue from all sources and subtracting the costs of doing business.

How does a small business pay taxes?

If you are a sole proprietorship, you will pay taxes as part of your own personal income. However, larger businesses will be responsible for taxes on every dollar that is earned by the companies. You may also be responsible for self-employment tax and income tax, depending on which type of entity your business is.

What is a business tax return?

A business tax return is very similar to a personal income tax return. You report your income, earnings, deductions and calculate the tax you owe the government. For a business tax return, you calculate your tax liability and pay the IRS money annually for the taxes you owe on the earnings you saw during the year.

How much should a small business save for taxes?

Some individuals would recommend saving 25% of what you earn for tax purposes, while other tax experts recommend saving up to 40% of what you earn to earmark for tax purposes. It’s always better to save more than you need when it comes to taxes; you don’t want to end up with an unexpected tax bill.

What is a business classification?

There are five types of entities that a business may be classified as (1) Sole Proprietorship, (2) Partnership, (3) Limited Liability Company (LLC), (4) S-Corporation, and (5) C-Corporation. Most entities are required to file a business income tax return.

In Conclusion

Paying federal, state, and local taxes as a business can be complicated. You may need to pay estimated tax payments throughout the year on a quarterly basis. How you pay your business income tax depends on the type of business you are engaged in.

For more information on how to file a business tax return, how to calculate your income tax rate, or how to pay taxes as a small business, please contact our office. We are more than happy to help you with any tax needs you may have.

There are many tax benefits for those who work for themselves. Working with a qualified tax consultant is your best bet for getting the right tax breaks and ensuring that your annual tax return and quarterly estimated tax payments are made correctly.

Please contact us for a free tax consultation. We also do business consulting! Find out how we can help you by reaching out today. You can trust Indiana’s tax expert!


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