What kinds of taxes does a small business have to pay every year? When you start a small business, you might hear a lot about all the tax breaks you’ll get. While there are tax breaks for businesses, it’s also important to know about all the taxes you’ll be responsible for each year. Here’s an overview of different business taxes you may need to pay and where to find out more information on each of them.
Federal Income Taxes
Everyone has to pay federal income taxes. The way you’re taxed and the forms you fill out will vary depending on the structure of your business.
Sole Proprietor
You’ll pay income taxes using a Schedule C (Form 1040).
If you make more than $400 annually from self-employment, you also have to pay self-employment taxes. These are your contributions to Medicare and Social Security, which would be withheld from your paycheck if you had an employer. File your self-employment taxes using Schedule SE (Form 1040).
If you expect to owe $1,000 or more in federal taxes in a tax year, you need to pay your income taxes and self-employment taxes quarterly by making estimated tax payments.
See the IRS’ guidance for sole proprietors for more information and tax forms.
Partnership
Partnerships file what’s called an “annual information return” listing the business’s income, deductions, gains and losses from the year. However, since income from a partnership flows through to the partners and is taxed at their individual income tax rate, your share of the business’s income or losses will be declared on your personal taxes.
Like sole proprietors, partners also have to pay self-employment taxes and make estimated tax payments.
Corporation
A C corporation files its own federal income taxes using Form 1120. Income distributed to shareholders as dividends is also reported on their personal tax returns. In effect, C corporations pay taxes twice. S corporations avoid this “double taxation” by flowing income through to the shareholders, who report it on their personal tax returns.
Owners of S and C corporations don’t pay self-employment tax because they are employed by the corporation. However, they may have to pay estimated taxes.
See the IRS’ guidance for C corporations and S corporations for more information and tax forms.
Limited Liability Company (LLC)
The IRS may treat an LLC as a corporation, a partnership, or part of the LLC’s owner’s tax return depending on elections made by the LLC’s members. Learn more about federal taxes and LLCs.
Federal Employment Taxes
If you have employees, you must pay employment taxes (also called payroll taxes).
Federal employment taxes include withholding federal income tax, Social Security and Medicare tax (called FICA taxes), from employees’ gross wages and remitting it to the IRS. In addition to withholding the appropriate amounts, you also have to match your employees’ FICA taxes and pay that amount when you remit your employees’ taxes withheld.
Finally, you have to pay federal unemployment tax (called FUTA tax) for each employee. Employees do not pay this tax, or have it withheld from their wages.
See the IRS’ guidance on employment taxes.
State and Local Taxes
Depending on your state, you may also need to pay state income taxes. In addition, your city, county or municipality may charge taxes. For instance, some cities charge an “occupational privilege tax,” also called a “head tax,” requiring employers to pay a per-employee amount based on how many employees they have.
You can find out about state and local taxes by contacting your state tax board. The IRS website has links to state tax information.
State Employment Taxes
Each state has specific requirements for whether you need to withhold and pay employment taxes. Some states also require you to withhold and/or pay state unemployment taxes, state workers’ compensation taxes or state disability taxes.
If you have an employee who works remotely but lives out of state, you typically need to withhold state taxes for the state in which the work was done.
If an employee lives in one state but works in another (in other words, crosses the state border every day to get to work), you generally have to withhold state taxes for the state where the work was done.
Check with your state’s tax authority or the tax authority where your remote employees live and work for more details. The IRS website has links to state tax information.
Excise Tax
Excise taxes are federal taxes charged if you make or sell certain products; operate certain kinds of businesses; use specific types of equipment, facilities or products or get paid for certain services. Generally, excise taxes relate to communications, transportation, emissions or wagering-related businesses.
Visit the IRS website for information on excise taxes.
Sales Tax
If you sell products, most states require you to collect sales tax and remit it to the state department of revenue. Each state has its own laws about what specific products are subject to sales tax.
Some cities, counties or municipalities also charge their own sales taxes on top of state sales taxes.
Visit your state’s department of revenue to find out about sales taxes and apply for a sales tax permit.
If you buy products for resale, you can avoid paying sales tax when you purchase the goods, by getting a reseller number. Contact your state’s tax agency to get a resale permit, certificate or license (it varies by state) which will give you a reseller number.
The Tax Foundation maintains a list of state and local sales tax rates. Or try the sales tax calculator from QuickBooks.
Online Sales Tax
If you sell products online, sales tax gets even more complicated. It used to be you only had to collect sales tax if you had a physical presence (“nexus”) in the state where the customer lives. A June 2018 Supreme Court ruling changed that, allowing individual states to require ecommerce businesses to collect sales tax from products they sell to customers in that state. Using shopping cart software that calculates sales tax automatically will help make it easier to track and remit your sales tax.
Check out our Ultimate Guide to States with Laws Requiring Collection of Internet Sales Tax and this map indicating the Remote Seller Nexus laws that apply in each state.
Property Tax
Do you own the building where your startup will be located? If so, your state may require you to pay property tax. States may also collect property tax on other business assets such as your equipment or company vehicles.
Gross Receipts Tax
In states that don’t charge businesses state income tax, you may have to pay a tax on your company’s gross receipts (that is, gross revenues) instead.
Franchise Tax
Some states charge partnerships, corporations and LLCs a franchise tax for doing business in the state. You might have to pay franchise tax even if your business isn’t physically located in a state — for instance, if you ship products to the state, or if you incorporated in a state outside your home state for tax benefits. Franchise taxes are typically based on your company’s net worth.
Additional Small Business Tax Resources
Links to state tax information
IRS Small Business and Self-Employed Tax Center
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Aira Bongco
Thanks for this. Taxes are a need and it must be done. It is better to know how it is computed than simply hiring someone to do it.