Have you just started a new business and don’t know what small business taxes you will need to pay? You probably have a million decisions you have to make right now as a new small business owner; hopefully, in this article, you will learn something new that will help you as you deal with the many concerns new businesses have to handle.
Are you wondering what small business owner taxes you will be responsible for? Often, the types of taxes you must pay depends on the activities your business is involved in. For example, if you are selling products or services, you may need to pay sales and use tax. If you have employees or are self-employed, there are different taxes for those things, too.
How your business is structured determines what taxes you may have to pay and how you need to pay them. What business entity you choose will determine these things. For example, if you decide to form a partnership, you will file an information tax return.
Make sure you understand the business entity you choose when forming your business, or work with a qualified business consultant who can help you make the best decision. A qualified tax consultant can help you with your business tax returns; this is especially helpful if you file estimated quarterly taxes or pay payroll or self-employment taxes.
Let’s learn all about paying taxes for your small business!
Small Business Taxes You May Need to Pay
Income Tax for Small Businesses
Usually, when you work as an employee, you get your income tax withheld from your paycheck. If there is not enough taken out, you usually pay taxes during tax season. Likewise, if you overpay, you may be entitled to a tax refund. However, as a business owner, you are typically required to pay the federal income tax as you earn or receive income during the tax year.
This is usually done through the payment of estimated quarterly tax payments. This way, you will be paying your income as you go.
The IRS explains the reverse side of this in IRS Publication 583: Start a Business and Keeping Records, where it talks about paying any taxes due when you file your annual tax return rather than paying quarterly estimated taxes throughout the year.
If you have a partnership, you will file an annual information return. You do not need to pay income taxes. Instead, you report your profits and losses on your annual tax returns.
If you have employees, you will need to withhold federal income tax from their wages. This can be complicated because you need to calculate how much to withhold. To easily determine how much tax to withhold, you will want to use each employee’s IRS Form W-4.
You can use the IRS’s Withholding Tables explained in IRS Publication 15: Employer’s Tax Guide (Circular E) to determine the correct amount to withhold from your employees’ wages.
The IRS explains that you are required to deposit your withholding. The requirements for that are also explained in IRS Publication 15: Employer’s Tax Guide (Circular E). The requirements will vary depending on your business and how much you withhold from your employees.
For more assistance with this, check out the IRS’s Income Tax Withholding Assistant for Employers. It’s an easily downloadable spreadsheet that will help you calculate the exact amount to withhold.
Most states require businesses to pay income tax. Each state and locality has its own laws regarding taxes. Find out more about the state requirements for your particular state on the United States Small Business Administration’s page for Paying Taxes. They have an interactive tool where you toggle down to your state to get access to your state’s website.
The taxes you pay for self-employment tax is made up of social security and Medicare tax. This is usually reserved for those who work for themselves (those who are sole proprietors and are self-employed). Making sure you pay your self-employment tax the right way is a crucial part of being in business for yourself.
The payments made for self-employment tax are important as they contribute to your social security and Medicare coverage under their system. This coverage provides you with certain retirement benefits, disability benefits, survivor benefits, and Medicare benefits if and when you need those things.
In most cases, to pay your self-employment tax, you need to fill out IRS Schedule SE: Self-Employment Tax with IRS Form 1040 or IRS Form 1040-SR if one of the following were true for you:
- Your net income from self-employment was $400 or more.
- You worked for a church or qualified organization that elected an exemption from social security and Medicare taxes and received $108.28 or more in wages.
The tax rate for self-employment tax is 15.3%. This is made up of two things: social security (12.4%) and Medicare (2.9%). Social security is for old-age, survivors, and disability insurance, and Medicare is for hospital insurance.
For more information on self-employment tax, check out the IRS page for Self-Employment Tax (Social Security and Medicare Taxes).
Since you are usually required to pay taxes on any income you make, the IRS has you pay taxes like your self-employment tax on your quarterly estimated tax payments throughout the tax year if you meet certain requirements.
To be clear, estimated taxes are not another tax you have to pay; it is a method used to pay your taxes to the IRS. Estimated tax payments include self-employment, interest, and dividends. If you are not able to take enough income tax from your salary, pension, or other sources of income, you may want to pay estimated taxes to avoid getting penalized when you file your annual tax return.
Typically, only those who have to run their own business or those who do not have enough income tax withheld in their paychecks, like those running a side hustle, need to pay estimated taxes. Just because you are self-employed or have a side hustle does not necessarily mean you will need to pay estimated taxes.
Find out if you have to pay estimated taxes by using table 2-A: Do You Have to Pay Estimated Tax? in IRS Publication 505: Tax Withholding and Estimated Tax. The basic rule used is: If you expect to owe $1,000 or more come tax season, you will need to pay estimated taxes.
When paying quarterly estimated taxes, you will want to pay them on the following dates:
Payment Due Date
Estimated Quarterly Payment #1 April 15
Estimated Quarterly Payment #2 June 15
Estimated Quarterly Payment #3 September 15
Estimated Quarterly Payment #4 January 15 (of the following year)
For more information on estimated taxes, check out IRS Publication 505: Tax Withholding and Estimated Tax.
Keep in mind that if you have employees, you will have certain tax responsibilities to them, as mentioned above. You are required to deposit and report employment taxes on the specified due dates.
There are certain forms you must file and payments you must pay. Use IRS Form W-2: Wage and Tax Statement to report all wages, tips, and any other compensation that was paid to an employee. Use IRS Form W-3: Transmittal of Wage and Tax Statements to transmit IRS Forms W-2 to the Social Security Administration, according to the IRS.
If you withheld $600 or more during the tax year (this includes all amounts if any income, social security, or Medicare tax was withheld) for an employee, you must file a W-2 form for that employee, even if the employee is related to the employer.
For more information about IRS Form W-2, check out the IRS’s page, About Form W-2: Wage and Tax Statement.
Some of the employment taxes you will be responsible for include:
- Social Security and Medicare Taxes (FICA)
- Federal Income Tax Withholding
- Federal Unemployment Tax (FUTA)
According to USA.gov, every state requires businesses to pay state workers’ compensation insurance and unemployment insurance taxes as part of their employment taxes.
For more information on the employment taxes you are responsible, check out the IRS page on Employment Taxes for Small Businesses.
Excise taxes are taxes that must be paid when purchases are made on specific goods, such as gasoline. Typically, excise taxes are part of the price of the product. Some activities, such as wagering, require you to pay excise taxes. The major component of the excise program is fuel for motor vehicles and/or equipment.
You may need to pay excise tax if you do the following:
- Make or sell certain products
- Operate certain kinds of businesses
- Use different kinds of equipment, facilities, or products
- Receive payment for certain services
To report your excise tax, you will want to use IRS Form 720: Quarterly Federal Excise Tax Return if you have the following taxes:
- Environmental taxes
- Communications and air transportation taxes
- Fuel taxes
- Tax on the first retail sale of heavy trucks, trailers, and tractors
- Manufacturers taxes on the sale or use of a variety of different articles
To report your excise tax, you will want to use IRS Form 2290: Heavy Highway Vehicle Use Tax Return if you owe federal excise tax on certain trucks, truck tractors, and buses used on public highways. The tax reported on this form applies to vehicles having a taxable gross weight of 55,000 pounds or more.
You will want to report your excise tax on IRS Form 730: Monthly Tax Return for Wagers if you are in the business of accepting wagers or conduct wagering pools or lotteries.
Use IRS Form 11-C: Occupational Tax and Registration Return for Wagering if you have any wagering activity and pay the federal occupational tax on such wagering.
Other forms may be needed depending on your business. Excise tax has many general excise tax programs that you may need to know about. One major example is motor fuel. A tax accountant can best help you determine which forms you need, how to fill them out, and when you need to pay excise taxes.
Capital Gains Tax
This is not a typical tax for small businesses, but if you sell a capital asset, such as land or property, you are required to pay capital gains tax.
Learn more about how to make capital gains tax work for you, including definitions of what capital gains and losses are, the rates you need to know, and the best ways to reduce the amount of capital gains tax you must pay.
The IRS has more information on capital gains tax, including capital gains tax rates, in IRS Topic Number 409: Capital Gains and Losses.
Sales and Use Tax
According to the USA.Gov website, states may tax the sales of your goods and services. Each state is different. States may also tax your business on the use of your goods and services if sales tax hasn’t been collected. This usually applies to any goods and services that were bought outside of the state where you conduct your business.
This list is not inclusive of all taxes that you will be required to pay as a small business, but it’s a good start. For example, you may have to pay property taxes if you own property. Each state defines taxable property differently.
USA.Gov explains that some states collect property tax for commercial real estate locations, while others collect property tax for computer equipment, cars, and other major business assets. The amount of tax you are required to pay is calculated, in part, by the total value of the property or as a percentage of the value of the said property.
Learn more about your state’s tax laws on the IRS’s State Government Websites page.
Other Considerations You Need to Be Aware Of
Small Business Tax Rates
For C-Corporations, the tax rate is 21%, but for all other business entities, the tax rate is determined by your filing status and income bracket. If you have one of these business entities (Sole Proprietorship, Limited Liability Company, Partnership, and S-Corporation), you will pay your business taxes on your personal income tax return. That is where you will report the income made by the business.
Use the tax rate you would use on your individual tax return as the tax rate for your small business tax rate. Depending on which year you are filing, you can look at the tax rate tables to determine the correct rate for you. This will also depend on your filing status. If you are married, but you will be filing separate tax returns, you will need to use the MFS tax rate.
If you are unsure of your filing status, you may want to speak to a tax accountant about which status provides you with the best tax outcome, provided you have a choice of more than one filing status.
How to File Small Business Taxes
For certain businesses, you will need to file IRS Form 1120: U.S. Corporation Income Tax Return. Corporations in the United States need to use this form to report their income, gains, losses, credits, and deductions. Also, this form will be where corporations figure their income tax liability.
All businesses must complete and file an annual tax return for their business. If you are unsure of what type of entity your business is, check out the IRS’s Business Structures page for more guidance. A sole member LLC, for example, will fall under the same rules as a sole proprietorship.
The taxes and forms you need to pay and file for a sole proprietorship can be found on the IRS’s Sole Proprietorships page. The taxes and forms needed for a Limited Liability Company (LLC) can be found on the IRS’s Limited Liability Company (LLC) page.
As mentioned, partnerships are treated differently. The IRS page for Tax Information for Partnerships should help clarify things.
For all forms, you need to file your small business taxes, check out the IRS’s Forms and Instructions – Filing and Paying Business Taxes page.
Frequently Asked Questions
What things can you write off on taxes for a small business?
Business expenses that you can write off may include meals, travel expenses, vehicle use, business insurance, office supplies, home office expenses, telephone, internet, business interest, and bank fees. These expenses must be related to work, though. Learn more about whether you can take the home office deduction before trying to take it on your tax return.
What do I need to know when filing small business taxes for the first time?
One thing you should do when filing your business taxes for the first time is to work with a qualified tax professional. Be sure to review your tax return when it is done, very thoroughly. Make sure you keep track of your vehicle expenses with a mileage log.
What are small business tax offsets that I can use?
Many business professionals offset their tax debt with business-related meals and travel expenses. If there are work-related vehicle costs, those could be used to offset your taxes, as well. You may even be able to write off partial expenses related to the internet or telephone, depending on if they are related to business or not.
What is the small business tax discount?
Under the latest tax law, as reported in 2019, most small businesses, such as sole proprietorships, limited liability companies, and partnerships, can deduct up to 20% of their income on their taxes. Some corporations may also be eligible, such as S-corporations.
What are the best tax deductions for limited liability companies?
One tax deduction a limited liability company (LLC) may want to consider is charitable contributions. A qualified LLC may be able to deduct charitable contributions of up to 10% of its taxable income. Another popular tax deduction for an LLC is business insurance. Companies can use tax deductions to offset their tax debt.
If you are feeling overwhelmed by all of this information, know that you are not alone; many people feel frustrated when it comes to taxes with their new or existing small business. Luckily, small business tax help is available! You can contact us today for a free consultation.
Starting a new business is not all about paying taxes, though. You can get many tax benefits, including tax deductions and tax credits. We understand the various aspects of these things and can help you get the best results on your tax return. Whether it is an annual tax return or quarterly estimated tax payments, we can help you along the way.
Small businesses may be able to get a tax deduction for making charitable contributions. There are specific reporting requirements when you donate certain items. It’s best to work with a qualified tax accountant when taking tax deductions.
A qualified tax consultant can help you fill out the right forms in the correct way and knows the ins and outs of the best deductions and credits to reduce the amount of tax you owe the IRS. You may be able to reduce your tax liability if you work with someone who is knowledgeable about tax laws, rules, and regulations.
At Borshoff Consulting, we can help you with tax preparation, and we know the correct tax forms you will need to fill out as a small business and where to send in your forms and payments. It’s important to work with someone qualified to help with these matters.
You want to make sure you do your taxes correctly the first time around, right? Why not work with Indiana’s tax expert, Sherry Borshoff?
We don’t just do taxes; we can help you with your business since we do business consulting and other related services. It’s a good idea to reach out to a qualified business consultant when starting a new business. Regardless of your business’s purpose, we can assist you in reaching your goals while maintaining your values.
We understand that you have many decisions to make right now, and we are here to help you out. Just reach out today to see how we can best serve you.