Businesses have to contend with many different types of taxes like federal, state, and local taxes. Taxes may depend on different business practices, such as selling taxable goods or services, using machinery, owning business property, having employees, and more.
Any activity associated with your business can have an impact on your taxable income, for instance, purchasing new equipment or increasing headcount. If you’ve just started your own business, knowing exactly the types of taxes you need to pay will help you stay afloat for a long time.
Income Tax
All types of businesses must pay taxes based on the company’s profit. The Tax Cuts and Jobs Act (TCJA) reduced the top corporate income tax rate from 35% to 21%.
Taxable corporate profits are equal to a corporation’s receipts minus the allowable deductions like wages, depreciation, and advertising, among many others. The same rules mostly apply to US-based corporations owned by foreign multinationals.
Many US businesses are not subject to the corporate income tax, however. Small companies like single owners and single-member LLCs, partners, and members of S-corporations pay taxes via pass-through tax, or through their personal income tax returns.
Dividend Tax
The IRS considers dividends to be income, so they are also taxed. All dividends are taxable and all dividend income must be reported.
Two types of dividends are recognized: ordinary, which are paid out from corporate earnings, and qualified, which are ordinary dividends that are taxed at the lower long-term capital gains tax rate after meeting certain criteria.
Dividends are reported using Form 1040. For dividends that total more than $1,500 or if you received dividends from someone else as a nominee, Schedule B is used.
Sales Tax
If you are operating in a state that has sales taxes, you must collect the amount from your customers, report it, and pay it to the state department of revenue. It is estimated that sales taxes can cost between 2.9% and 7.25% of the price of the goods.
Sales tax is determined by multiplying the purchase price by the applicable tax rate. Merchants are expected to collect the tax at the time of the sale. Online sellers are not excluded from this tax as many states are now requiring online sellers to collect it as well.
Excise Tax
An excise tax is a federal tax levied on purchases of motor fuel, airline tickets, cigarettes, and other goods and services. Federal, state, and local governments have the power to set excise taxes. Excise taxes only account for a small portion of total federal and state revenue.
Excise taxes are taxes that must be paid solely by businesses. They are separate from other taxes a business must pay like income taxes. Businesses are required to file Form 720 Federal Excise Tax Return on a quarterly basis and include quarterly payments.
Property Tax
Businesses are required to pay real estate taxes on the assessed value of their property. If you purchase any kind of real estate for your company, the property will be registered with the local taxing authority and you will be notified about the increases in your assessed value and the amount of taxes you owe. If the property is sold, the business property tax is divided between the former and the new owners for the period.
Franchise Tax
Franchise tax is levied at the state level on businesses and partnerships for the right to exist and continue business as a legal entity. In some states, a business may be charged a franchise tax even if it is chartered in another state. The rate of the franchise tax can differ greatly depending on the state.
States that charge a franchise tax include Alabama, Arkansas, Delaware, Georgia, Illinois, Louisiana, Mississippi, Missouri, New York, North Carolina, Oklahoma, Pennsylvania, Tennessee, Texas, and West Virginia.
Self-Employment Tax
Self-employment taxes consist of Social Security and Medicare taxes collected from individuals who work for themselves. It works like Social Security and Medicare taxes that are withheld from the pay of wage earners. The self-employment tax rate is 15.3% consisting of two parts: 12.4% for social security and 2.9% for Medicare.
The IRS requires self-employed taxpayers to figure self-employment tax by themselves using Schedule SE (Form 1040 or 1040-SR). It added that you can deduct the employer-equivalent portion of your self-employment tax in figuring your adjusted gross income.
Estimated Taxes
Taxes must be paid as you earn or receive income during the year through withholding tax or estimated tax payments, according to the IRS. Business owners are not subject to withholding tax, so they are required to pay an estimated tax quarterly.
According to the IRS, individuals, including sole proprietors, partners, and S corporation shareholders, have to make estimated tax payments if they expect to owe taxes worth $1,000 or more when their return is filed. Corporations are required to make estimated tax payments if they expect to owe tax of $500 or more when their return is filed.
Failure to pay an estimated tax payment merits a penalty. Business owners may also incur a penalty if their estimated tax payments are paid late.
Employment Tax
Employment taxes are the taxes that the employer, the business, and the employees must pay to federal, state, and local agencies. The IRS requires employers to withhold federal income, social security, and Medicare taxes from employees’ wages and deposit these withholdings. At the end of the year, the IRS requires business owners to prepare and file Form W-2, Wage and Tax Statement to report wages, including tips and other employee compensations.
Gross Receipt Tax
Gross receipts are the total revenue from all sources without subtracting deductions. It’s strictly the total amount of revenue your business collected within the tax year. Some states charge a tax on the total gross receipts. These states include Delaware, Nevada, Ohio, Oregon, Texas, and Washington.
If you do business in the states that charge a gross receipt tax, you could have a tax liability and not realize it, which could result in a fine. If you’re unsure, it is advisable that you contact a tax professional.
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