IRS Small Business Tax Guide: What Taxes to Pay as a Small Business Owner

As a small business owner, you’re in charge of more than just your products or services; you’re responsible for your  taxes. You need the best small business tax guide to stay on top of your tax obligations.

As per the Small Business Administration (SBA), a small business is defined as a company with fewer than 500 employees. According to the most recent data, there are 33.2 million small businesses in the United States, constituting 99.9 percent of all businesses in the country.

It is important to understand your tax obligations, not only to be compliant with the law, but also for optimizing your financial operations.

Small Business Tax Guide: Overview of the Various Taxes Applicable to Small Business Owners

To run your small business’s finances well, you must understand the different taxes you have to deal with. These include federal income tax and state and local taxes. They are all part of your financial responsibilities.

Types of Business Structures and Their tax Implications

Your business’s tax situation depends on its structure. Let’s briefly explain each type of business structure in this small business tax guide:

1. Sole Proprietorships

Sole proprietorships are the simplest business structure. As a sole proprietor, your business income and personal income are often intertwined. You report your business income and expenses on your personal tax return using Schedule C. This direct connection simplifies tax reporting but also exposes your personal assets to business liabilities.

2. LLCs (Limited Liability Companies)

Limited Liability Companies, or LLCs, offer the advantage of liability protection for their owners. LLCs are considered pass-through entities for tax purposes. This means that the business’s income and losses pass on to the owners’ personal tax returns. LLC owners can choose to be taxed as a sole proprietorship, partnership, S corporation, or C corporation, depending on their specific tax goals.

3. S Corporations

S corporations, or S corps, are popular among small businesses due to their potential tax benefits. They avoid double taxation by passing their income and losses through to their shareholders, who report these amounts on their individual tax returns. However, S corps have strict eligibility criteria and to adhere to certain regulations.

4. C Corporations

Unlike S corporations, C corporations, or C corps, are separate legal entities responsible for paying corporate income tax. While this can result in double taxation, the C corps enjoy certain tax advantages, such as deducting employee benefits. Choosing this structure demands careful consideration of tax implications and long-term goals.

5. Partnerships

Partnerships involve multiple owners who share business profits and losses. Similar to sole proprietorships, partnerships are pass-through entities, meaning that income and losses flow through to the individual partners’ tax returns. However, partnerships require specific tax documentation and agreements among partners.

Small Business Tax Guide: Federal Taxes for Small Businesses

Small business owners have the obligation to pay certain federal taxes, which are different from local and state taxes.

Income Tax

In general, the federal income tax is structured as progressive, implying that individuals with higher incomes pay higher tax rates.

Business income is typically reported on the business owner’s personal tax return. As mentioned earlier, the specific form used depends on the business structure.

Sole proprietors and single-member LLCs use Schedule C, while partnerships use Form 1065. S corporations and C corporations have their own tax return forms.

Business income includes more than just sales revenue; it also encompasses other sources such as interest, dividends, and rental income. It’s crucial to accurately account for all sources of income.

Tax Rates for Different Income Levels

The United States uses a progressive tax system for individual income, with different tax brackets. The tax rate you pay depends on your taxable income. Therefore, you need to know and understand these brackets and rates in order to plan your taxes well.

Furthermore, C corporations have their own corporate tax rate, which differs from individual tax rates. As at the time we published this article, the corporate tax rate is 21%, but it’s important to check for any updates or changes in tax laws.

Self-Employment Tax

Self-employment tax is a unique tax obligation for individuals who work for themselves. It covers both Social Security and Medicare taxes, which are typically withheld by employers for employees. Self-employed individuals are responsible for paying both the employer and employee portions of these taxes.

Calculating and Paying Self-Employment Tax

Self-employment tax is calculated based on your net earnings from self-employment. To determine the amount you owe, you’ll need to complete Schedule SE and report your self-employment income. Accurate record-keeping is essential for calculating and paying this tax correctly.

Employment Taxes

These are the taxes that employees and employers contribute to support government programs and benefits.

Overview of FICA (Federal Insurance Contributions Act) Taxes

FICA taxes fund Social Security and Medicare programs. As a business owner, you must withhold FICA taxes from your employees’ paychecks and match their contributions. Understanding your responsibilities under FICA is crucial to ensure compliance with federal tax regulations.

Understanding FUTA (Federal Unemployment Tax Act) Tax

FUTA tax is used to fund unemployment benefits for workers who lose their jobs. Employers are responsible for paying FUTA tax based on their employees’ wages. FUTA tax rates and wage base limits can change, so it’s important to stay updated on these figures.

State and Local Taxes for Small Businesses

The state and local tax obligations for small business owners in the United States include:

1. State Income Tax

State income tax laws vary widely across the United States. Some states have no income tax, while others have progressive tax rates similar to the federal system. Therefore, you should learn about your state’s specific tax laws and how these laws impact your business, to avoid tax issues.

Impact of Business Location on State Taxes

Your business’s physical location can significantly affect the state income tax you owe. Some states may offer tax incentives or deductions for businesses in specific regions or industries. Conversely, you might face higher taxes in certain areas due to local ordinances.

2. Sales Tax

Sales tax is a consumption tax imposed on the sale of goods and services. The tax rates and regulations vary by state and even within local jurisdictions. Understanding when and how to collect sales tax is essential for businesses that sell tangible products or certain services.

Collecting and Remitting Sales Tax

Small businesses must register with their state’s taxing authority to collect sales tax. You’ll need to determine the appropriate tax rate for each sale, collect the tax from customers, and regularly remit the collected tax to the state. Again, compliance with sales tax regulations is vital to avoid penalties.

3. Property Tax

Property tax is a local tax levied on real property, such as land and buildings. Small business owners who own or lease commercial property may be subject to property taxes. To reduce your property tax bill, it’s important to understand property tax assessments and challenge incorrect property valuations through appeals.

Small Business Tax Guide: Deductions and Credits for Small Businesses

Tax credits and deductions are good ways to reduce your tax liabilities. Let’s see some tax deductions available to small businesses in the US:

Common Deductions for Small Businesses

1. Home Office Deductions

If you operate your business from a home office, you may be eligible for a home office deduction. This deduction allows you to allocate a portion of your home expenses, such as rent, mortgage interest, utilities, and maintenance, as a business expense. To qualify, you must meet specific IRS criteria.

2. Business Expenses Deductions

Deducting business expenses can significantly reduce your taxable income. Common deductible business expenses include office supplies, marketing costs, travel expenses, and professional fees. Keep thorough records and receipts to support these deductions during the tax season.

Tax Credits Available to Small Business Owners

The following tax credits are available to eligible small business owners:

1. Research and Development Credits

The federal government offers research and development (R&D) tax credits to incentivize innovation. Small businesses engaged in qualifying R&D activities may be eligible for these credits, which can offset a portion of their tax liability.

2. Small Business Healthcare Tax Credits

The Affordable Care Act provides tax credits to small businesses that offer health insurance to their employees. Understanding the requirements and calculating the available credits can help small business owners provide healthcare benefits to their workforce while reducing their tax burden.

Compliance and Record-Keeping

Maintaining accurate financial records is the foundation of effective tax compliance. Accurate records not only facilitate tax preparation but also serve as evidence in case of an IRS audit. Small business owners must establish strong record-keeping practices.

Filing Deadlines and Requirements

Meeting tax filing deadlines is crucial to avoid penalties and interest charges. Different business structures have varying tax filing due dates. Get to know these deadlines and make sure to submit your tax returns accurately and punctually.

Keeping Financial Records Organized

Organizing your financial records makes tax preparation more efficient and less stressful. Consider using accounting software or hiring a professional bookkeeper to help streamline your record-keeping process. Staying organized year-round ensures you have the necessary documentation when tax season arrives.

Small Business Tax Guide: Tax Planning Strategies

Tax planning is a proactive approach to managing your tax liability. You can reduce your total tax burden by smartly organizing your financial transactions. Effective tax planning involves forecasting income, considering deductions, and leveraging credits.

1. Year-End Tax Planning Tips

As the end of the tax year approaches, consider implementing year-end tax planning strategies. These might include accelerating deductions, deferring income, and reviewing your business structure to optimize your tax position. Therefore, consult with an experienced tax professional near you to identify the best tax strategies for you.

2. Seeking Professional Tax Advice

Although this article offers a thorough look at small business taxes, it’s important to note that the tax laws are constantly changing and you need to stay on top of your taxes to avoid penalties.

To ensure compliance and maximize tax benefits, it’s advisable to seek the guidance of a qualified tax professional. A tax advisor can provide personalized advice tailored to your business’s unique situation.

Conclusion: Small Business Tax Guide

Small business owners face a multitude of tax obligations, from federal income tax to state sales tax. Understanding these obligations and effectively managing them is essential for financial success.

Tax laws and regulations can change, so it’s crucial to stay informed about updates that may impact your business. Staying compliant with tax requirements will help you avoid penalties and also contributes to the long-term sustainability of your business.

Hence, consult a reliable tax professional near you to develop a tax plan that aligns with your financial goals and ensures your business’s continued success.

Small Business Tax Guide: FAQs and Answers on What Taxes To Pay As Small Business Owner in the United States

Here are some frequently asked questions (FAQs) about taxes for small business owners in the United States, along with brief answers:

1. What types of taxes do small business owners need to pay?

Small business owners typically need to pay federal income tax, self-employment tax, state income tax (if applicable), and potentially other taxes like sales tax and payroll tax.

2. How is self-employment tax calculated?

Self-employment tax is calculated at a rate of 15.3% of your net earnings, which includes both Social Security and Medicare taxes. This rate is typically split between the business owner and the employee, with the owner responsible for the entire amount.

3. Do I need to pay estimated taxes?

Yes, if you expect to owe $1,000 or more in taxes when you file your return, you should make estimated quarterly tax payments to the IRS to avoid penalties.

4. What are the tax deductions available for small businesses?

Small businesses can deduct expenses such as business-related travel, office rent, employee wages, and certain startup costs. The Tax Cuts and Jobs Act (TCJA) also introduced the Qualified Business Income (QBI) deduction for eligible businesses.

5. Should I choose a sole proprietorship, LLC, or corporation for my business?

The choice of business structure impacts your tax obligations. Consult with a tax professional to determine which structure is best for your specific situation.

6. How do I report business income and expenses?

Most small businesses report income and expenses on Schedule C of their personal tax return (Form 1040). Corporations and some LLCs have separate tax return forms.

7. When is the tax filing deadline for small businesses?

The deadline for filing federal income tax returns for most small businesses is April 15th. However, if your business operates as an S corporation or partnership, the deadline may be March 15th.

8. What is the Small Business Health Care Tax Credit?

The small business health care tax credit helps small businesses with fewer than 25 full-time equivalent employees provide health insurance to their employees. It can be claimed when filing taxes.

9. Do I need to collect and remit sales tax?

Sales tax requirements vary by state and locality. You may need to collect and remit sales tax on goods and services sold, so it’s essential to understand your state’s rules.

10. Where can I get help with my small business taxes?

You can seek assistance from a certified public accountant (CPA), tax advisor, or use tax preparation software to help with your small business taxes. The IRS also offers resources and guides for small business owners.