Each year, more than $450 billion in taxes goes uncollected by the IRS. It’s little wonder the penalties for not paying your taxes can be so stiff.
If you own a business, you may find yourself in a more complex situation. Many people filing as individual taxpayers are also small business owners. Much of the uncollected tax is actually owed by businesses.
What do small business taxes look like in the United States, and why do you need to pay them?
Our guide will help you understand everything you need to know about small business taxes. You’ll learn what you need to pay and why, along with when you need to pay them. Finally, we’ll give you some tips for staying one step ahead of the IRS.
Small Business Structure Affects Taxes
Business taxes are paid by businesses in the United States. What you pay will depend on a few different factors, not least of which is the type of business you’re running.
Most businesses in the US are classified as small or mid-sized businesses. More than 11 million businesses have four or fewer employees.
These firms are often sole proprietorships. You as the owner are the only employee. In this scenario, you’ll file your taxes as an individual.
Things are more complex for sole proprietors than those employed by another company. For one, you’ll need to pay what’s known as the “self-employment tax.”
This tax isn’t a separate tax for being self-employed. Since you’re both employer and employee, you pay the employer part of Medicare and Social Security. If you were employed at another firm, your employer would pay that tax.
Some businesses function as partnerships. Partnerships enjoy pass-through taxes, which means the business itself doesn’t pay tax. Instead, taxes are “passed through” to the owners’ individual filings.
Finally, you may also pay business tax as a corporation. Both S-corporations and C-corporations are taxed in similar ways. If you have employees, you’re likely set up as a corporation.
The Types of Small Business Taxes
There are six types of tax a business might need to pay. They are:
- Income tax
- Payroll tax
- Excise tax
- Sales tax
- Property tax
- Self-employment tax
You may need to pay all or only some of these. For example, if you don’t have employees, you won’t pay payroll taxes.
Tax Rates for Small Businesses
The next thing you’ll want to know is what the tax rate is for small businesses. The answer depends both on how the business is set up and your income.
If you operate as a sole proprietorship, you’ll pay taxes at your personal rate. According to the SBA, this translates into an average rate of about 13 percent.
Partnerships tend to have a higher rate of about 24 percent. S corporations have the highest small business tax rate at almost 27 percent.
C corporations are taxed somewhat differently. For all business tax brackets, C corporations pay 17.5 percent.
The effective average rate for all small businesses is almost 20 percent.
What Taxes Do
You might wonder why you have to pay taxes at all. After all, what do federal taxes pay for?
A good part of the tax you’ll pay as a small business owner is actually for FICA taxes.
For people who work for other companies, the employer withholds these taxes and then pays a match. When you operate your own business, you’ll be responsible for paying both portions. The effective rate for Medicare and Social Security ends up around 15 percent.
In short, by paying your taxes, you’re investing in your future and your health.
Federal taxes do more, of course. Any program provided by the government is funded through taxes. It’s why the IRS is so concerned with the “tax gap” we mentioned above.
Payment Schedules for Small Business Owners
The next question you have is, “When do you have to start paying taxes?”
Like individuals, businesses must file their taxes by April 15 of the following year. If you expect to owe more than $1,000 in taxes at the end of the year, you’ll need to start paying sooner.
One of the pages of Form 1040 ES is the Estimated Tax Worksheet. You can use this sheet to estimate what you’ll owe the IRS at the end of the year. You’ll then need to make quarterly payments to them.
Quarterly payments are due on the 15 of January, April, June, and September. The best way to pay is through the Electronic Federal Tax Payment System (EFTPS) or IRS Direct Pay.
You can also mail in your voucher, but this won’t guarantee on-time payment.
If you owe payroll taxes, you may need to remit them to the IRS more frequently. As a general rule, payroll taxes are due whenever you conduct payroll.
If you pay your employees once a month, you should be remitting payroll taxes as often.
Self-employment taxes are payable in an annual lump sum.
As we noted, the IRS can assess some hefty penalties. The best thing a business owner can do is be prepared. You can follow these tips to make sure you’re prepared.
The easiest thing to do is make sure you submit your taxes on time. Pay attention to schedules. Using the preparation tips will help you stay organized and on top of deadlines.
You may also want to consider hiring a bookkeeper, accountant, or tax lawyer. They can help you prepare paperwork correctly and submit it on time to avoid penalties.
Finally, be aware of what you might owe. You should also pay attention to tax deductions available to you. They can help you relieve your tax burden and make it easier to pay.
Get the Advice You Need
Keeping up with small business taxes is just one of the many tasks you need to look after in your firm. Knowing what taxes you’re responsible for and what they entail can save you time and money as your business continues to grow.
As you expand your company, you have other concerns too. Check out our blog for more great business advice.