Business Income Tax
Just like an individual, businesses must pay several different kinds of taxes, some are easier to understand than others. The following are some general types of business taxes.
- Income Tax
- Estimated Taxes
- Self-Employment Tax
- Employment Taxes
- Excise Tax
There are also different types of taxes depending on various business activities, like selling taxable products or services, using equipment, owning business property, being self-employed versus having employees, and of course, making a profit.
If you are just starting your business, you need to know what taxes you’ll be expected to pay. If your business has changed—if you have bought property or started hiring employees, for example—you’ll need to know about the taxes associated with these activities.
All businesses must pay tax on their income; that is, the business must pay tax on the profit of the company. The form you use depends on how your business is organized.
Small businesses, partners in partnerships, and S-corporation owners pay taxes through their personal income tax returns. The concept called pass through tax is the same for all these business types.
Sole proprietors and single-member LLC members pay taxes by filing a Schedule C included with their personal return.
Partners in partnerships and multiple-member LLC owners file a partnership business tax return for information purposes only.
The individual partners or LLC members pay income taxes on their share of the income of the business, by including this income in their personal returns.
The federal income tax, you must pay the tax as you earn or receive income during the year. A pay as you go tax. An employee customarily has income tax held back from her or his pay. If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay an estimated tax. If you are not required to make estimated tax payments, you may pay any tax due when you file your return.
Businesses sales tax on products and services they sell don’t pay directly. If your business operates in a state that has state income tax, you must set up a system to collect, report, and pay state sales tax.
Merchants in most states are required to collect sales tax and pay it to the state department of revenue. Peculiar products and services are sales-tax suitable, depending on your state laws. Money must be collected from customers, reported, and paid on a regular basis.
Don’t forget sales taxes for items you sell online, which many states now are requiring for definite types of sellers.
If your business owns real estate, your business must pay property tax to the local taxing authority. This is usually the city or county where the property is located.
The tax is based on assessed value, same as for personal property like a house. There are special considerations for paying property taxes when you sell a piece of business property (capital gains taxes may have to be paid, and you should consult with a tax professional for such matters.
Excise taxes are paid by a business for certain types of use or consumption, like fuels, and other activities like transportation and communication. Excise taxes are paid to the IRS, either quarterly or annually, depending upon usage.
Based on the income of the business a self-employment is a social security and Medicare tax primarily for individuals who work for themselves. Because business owners are not employees, there is no pay to withhold these taxes from. So, self-employment tax is the alternative. LLC owners as well must pay self-employment tax. Owners of corporations who work as employees do not have to pay self-employment tax. Generally, you must pay SE tax and file Schedule self-employment if either of the following applies.
If your net earnings from self-employment were $400 or more.
If you work for a church or a qualified church-controlled organization (other than as a minister or member of a religious order) that elected an exemption from social security and Medicare taxes, you are subject to SE tax if you receive $108.28 or more in wages from the church or organization.
Business Owners Estimated Tax
Because you are the owner of a business, no one withholds income tax and self-employment tax from the money you take out of the business. Typically, you must pay taxes on income, including self-employment tax, by making routine payments of estimated tax during the year. The IRS requires that this tax be paid throughout the year, so you must pay estimated taxes quarterly. The first payment of the year is due April 15, then again on July 15, September 15, and January 15 of the following year. The estimated tax form for business owners combines business and personal income and taxes, including self-employment taxes.
Employment or Payroll Taxes
When you have employees, you as the employer have specific employment tax responsibilities that you must pay and forms you must file. Like sales taxes, some employment taxes are collected, reported, and paid. In this case, the taxes are paid to the IRS and the Social Security Administration. Employment taxes include:
- Social security and Medicare taxes
- Federal income tax withholding
- Federal unemployment (FUTA) tax
Gross Receipts Tax
Some states have a state income tax for businesses. But some states, like Nevada and Texas, require a gross receipts tax on businesses instead of a state income tax. In these states, gross receipts of the business are taxed. Most states allow deductions for this tax, and some types of businesses are exempt in some states.
Sole proprietorships are usually exempt from paying gross receipts taxes, but not from state income tax.
Corporations and LLCs are most likely to pay gross receipts taxes, determined by the fiduciary laws of the state in which they are located.
Franchise Taxes: Like Gross Receipts Tax
Some states charge franchise taxes to corporations based on the value of the business. These taxes are much like a state income tax or a gross receipts tax.
Sole proprietorships are not typically subjected to a franchise tax.
Dividend Tax on Corporate Shareholders
If you are an owner of a corporation, you are a shareholder. That means you pay income taxes on income you receive from dividends.