You’ll no doubt be aware that tax is payable if you make a profit, but you may be less familiar with the various tax types applying specifically to your business. Knowing where you’ll encounter tax considerations may inform your thinking in terms of what systems and software you invest in.
For example, if your business is involved in selling face to face where sales are transacted in person, then you’ll be involved in collecting and paying over sales tax. Therefore, modern point of sale (POS) equipment is a must to help collect and record these taxes properly.
Knowing what your tax situation is
While you may already have an accountant or other tax professional to handle tax affairs for you, it’s important to be aware of your tax situation as it can vary from one business to the other.
Business type reflects what tax rate is charged
Some businesses such as LLCs (Limited Liability Corporations) and sole proprietorships are classed as ‘pass through’ concerns. This means the business itself doesn’t pay income tax – the owners pay the tax on the business income at their particular tax rate.
This is reported on their personal tax returns that are submitted to the IRS (Internal Revenue Service). Choosing the correct business structure is all-important.
Different tax types
An overview of basic tax types:
Basic income tax is paid on profits after expenses and costs to the business have been calculated. The rate at which this is paid can vary depending on business type: for example, for 2019 a sole proprietor rate is 13.3%, small partnerships pay 23.6% and small S corporations 26.9%.
The self-employed have to pay self-employment taxes including Social Security and Medicare if earnings reach a certain level. Employees usually pay half of this with their employer funding the other half.
There’s no overarching federal sales tax in the US, but the majority of states – 45 of them – and various localities have sales tax regulations.
The business is responsible for calculating, collecting and providing accurate sales tax reporting hence the need for efficient POS systems as mentioned earlier.
Employment and payroll tax
If a business has employees, then it has to calculate and pay income tax due on their wages and salaries to the IRS; this includes Social Security and Medicare taxes.
If a business owns land or a commercial property, then property taxes at the prevailing rate have to be paid to the council or city authority where the real estate is located.
Certain products or services may attract excise taxes such as those levied on tobacco products and liquor. This tax is usually included in the price of the product and has to be collected, recorded and paid to the IRS by the business.
When do taxes require payment?
Knowing when various taxes are due is vital to avoid unexpected tax bills. Businesses should clarify with the IRS and their accountant, if they have one, when taxes are due and plan accordingly.
Generally, at certain stages throughout the year estimated taxes are paid based on what a business thinks it’ll make in that period. Any business expecting to owe more than $1,000 in taxes for a given year has to pay estimated taxes on a quarterly basis. When a business completes and submits its tax return, actual payments made are deducted from the total ‘confirmed’ liability.
Keeping abreast of tax rules and regulations
Tax legislation changes periodically, so it’s important for business owners to keep up to date with tax news both to ensure they’re still adhering to tax rules, and to take advantage of any new arrangements that may be to their advantage.
For example, new for 2019, sole proprietors and owners of businesses classed as ‘pass through entities’ can deduct up to 20% of their net business income before their tax rate is calculated. So for a business generating say $200,000 net in a tax year could deduct $40,000 and therefore only have to report $160,000 to the IRS as taxable income. It can literally pay to be well informed.