Business taxes: What are the main types & how do they work?
As a business owner, it’s important to understand the tax landscape in order to maintain financial stability and contribute to the larger economy. This article covers the main types of business taxes in the US, how they work, how to file them, and tips for managing your financial liability around tax payments. By the end,…
What are business taxes?
Business taxes refer to the taxes businesses must pay to engage in commercial activities. Government agencies usually impose these, and rules vary from state to state, country to country, and by entity type.
The primary purpose of business taxes is to ensure companies pay their fair share of the costs associated with running a society. This includes funding public services like roads, schools, and hospitals.
Business taxes also provide revenue for the government to invest back into the economy through infrastructure projects and professional initiatives.
Different types of taxes for businesses
Professional entities must pay several types of taxes, depending on the size and type of company. Some of the most common include:
Business income tax is a tax imposed on companies based on their income. This includes both profits and losses. You must pay a certain percentage of taxes on income, and the rate varies depending on the jurisdiction.
Income tax is collected through a filing system, where you submit your financial information to the relevant authorities. This is typically done annually, although some companies may be required to file more frequently.
It is worth noting that your business income tax requirements depend on your profits and the applicable tax rate. This means entities with higher profits pay more tax than those with lower profits. To illustrate this, a company with annual revenue in the millions will pay more than an individual who is liable for self-employment tax.
If your entity collects an income in more than one country, you might be liable to pay tax in each location.
Payroll and employment taxes
Payroll tax is a type of business tax that employers and employees pay based on the company payroll. Salaries, bonuses, commissions, and other employee benefits awarded fall under this particular category of employment taxes.
Several factors affect the amount of payroll tax that you pay. These include the size of the workforce, type of wages, venture size, and location.
The most common types of payroll tax include:
- Federal Insurance Contributions Act (FICA): Also known as Federal payroll tax, FICA taxes are imposed on employers and employees to fund Social Security coverage as well as Medicare programs. It is calculated as a percentage of wages paid by employers. Generally, this specific employee income tax is split between the employer and the employee.
- State Unemployment Insurance Tax (SUTA): This helps to fund state unemployment insurance taxes and programs. It is based on wages paid to employees, with employers typically paying a fixed rate plus an additional rate that varies according to their unemployment claims experience.
- State Disability Insurance Tax (SDI): This tax helps to fund state disability and compensation insurance programs. The rate is typically a fixed percentage of wages paid to employees, and employers are responsible for paying the entire amount.
- Federal Unemployment Tax Act (FUTA): This type of payroll tax is imposed by the federal government to fund unemployment insurance benefits for workers who have been laid off or otherwise lost their jobs.
Sales tax is a business tax on goods and services sold within a particular jurisdiction. This tax rate varies from state to state but typically applies to most purchases made by companies or consumers.
For example, if a company in Pennsylvania makes a retail sale on a product for 50 USD, the sales tax applied to that purchase would be 6%. The same purchase would be subject to an 8.875% tax rate in New York.
If your company is required to collect and remit sales tax, you have to register with the relevant government agency and obtain a permit or license. You must then track each taxable sale and calculate the proper amount of tax due.
You must also keep detailed sales records and submit filings regularly to ensure compliance.
There are different types of sales tax, including:
- General sales tax: This type of sales tax is imposed on most goods and services. The rate varies from state to state, with some states having a lower rate for specific items such as food or medicine.
- Use tax: This sales tax applies to goods purchased outside the entity’s jurisdiction. It is designed to ensure that companies operating within a particular jurisdiction still pay sales tax on purchases made elsewhere.
- Value-Added Tax (VAT): Value Added Tax is imposed in many countries around the world and is based on the value added to a product or service at each stage of production, from raw materials to final sales.
Property tax is a type of tax imposed on a company’s real estate and the land it owns. The tax is generally based on your property’s value and is typically imposed by local governments.
There are different property taxes, including:
- Annual property tax: This is an annual tax on the value of a property and is based on its assessed value. The amount of tax may vary depending on the jurisdiction and may be subject to appeal by the property owner.
- Real estate transfer tax: This type of tax is imposed when a piece of real estate is transferred from one party to another. The amount of tax is typically based on the property’s sale price and may be subject to appeal.
Within this category, there is also what is known as business personal property. In addition to real estate and land, you may be liable for paying taxes on your property as well.
Business personal property includes goods or items the company owns and uses for operations. A few examples of these types of business assets include:
- Office furniture, such as cabinets, desks, and chairs
- Office fixtures
- Computers and electronic equipment
- Company equipment
- General tools and supplies
Excise Tax is a type of tax imposed on the sale or use of specific goods and services, such as cigarettes, alcohol, fuel, and other items. The amount of the tax paid is usually based on the quantity or value of the item being taxed.
Federal or state governments impose this tax using an excise program. These federal excise taxes may be subject to appeal if the taxpayer believes the value or quantity of the item being taxed has been incorrectly assessed.
Excise tax may fall into either of these categories:
- Ad valorem taxes: These taxes are based on the value of the item being taxed. For instance, a 10% excise tax on cigarettes would mean that a pack of cigarettes costing $10 would be subject to an excise tax of $1.
- Specific taxes: These taxes are based on the quantity of the item being taxed, not its value. For instance, a 25 cents per gallon excise tax on fuel would mean that each gallon purchased would be subject to an excise tax of 25 cents.
How to file business taxes
Filing taxes can seem daunting, but it doesn’t have to be. The most important things are to stay organized, keep accurate records, and work with your accountant or tax advisor. Doing so will ensure you file the correct forms, adhere to tax compliance regulations, and pay what you owe on time.
Here is a step-by-step guide to give you an idea of the general process of filing taxes:
Determine your business structure
The first and most crucial step to take before filing your company taxes is to determine the type of legal structure your business entity falls under. There are several kinds of business and business structures – is yours a sole proprietorship, LLC, S-corp, or C-corp?
This information impacts the amount of your estimated taxes. It also determines how you file and what deductions apply.
Gather your records
After determining your venture’s structure, gather all the necessary documents for filing taxes.
The documents and business records required will depend on the entity’s structure and type of activity. For example, operating as a sole proprietor or LLC means you have to provide income statements, expense reports, and other documents that reflect your work activity throughout the year.
Similarly, S-corps or C-corps have to provide more detailed records, such as balance sheets and shareholder statements.
With all the necessary records, you can estimate your income and expenses. This step is critical to determining your tax liability.
To do this, thoroughly review your financial records. Examine all the possible deductions you may be eligible for, such as business equipment depreciation and travel costs. These deductions can reduce your taxable income and save some tax dollars.
Fill out the form
Once you have estimated your income and expenses, it is time to fill out the required form.
Depending on your legal structure, this could be a 1040-ES form (sole proprietorship), an LLC tax return (LLC), Form 1120S (S corp), or Form 1120 (C corp).
Remember to be thorough and double-check the entries you make. Any mistakes can lead to unnecessary admin and waste time. In turn, this can negatively impact your daily operations. So, take the necessary time to ensure everything is filled out accurately.
Once you have completed the form, it is time to file your taxes. Do this online or through the mail.
Doing it online is fast and easy, and you will receive a confirmation receipt immediately.
If filing by mail, send it early to ensure it arrives ahead of the cut-off date. Any delays in filing (even by a single business day), can result in avoidable penalty fees.
Remember to request an extension if you need more time to prepare your taxes. But, don’t make this a regular occurrence and only request the extra time under exceptional circumstances.
Tips for managing business taxes
Navigating the world of tax can be complicated and confusing. Here are some tips that can help you in managing taxes:
Understand your tax obligations
One of business owners’ biggest mistakes is not fully understanding their tax obligations and unintentionally withholding money owed to the IRS. It is important to know the types of taxes you are responsible for, how and when they are due, and the penalties associated with late or incomplete payments.
Understanding your tax obligations means you can plan ahead and pay the correct taxes on time. In turn, you avoid any issues with the IRS or other relevant government employees, entities, and programs.
Also, remember that tax laws are subject to change. It is, therefore, a good idea to stay up to date with the latest tax code changes and any new deductions or credits that could benefit your company.
Keep accurate records
Accurate record-keeping is essential for any venture. It helps you track expenses and business income, identify deductions, manage payroll taxes, and prepare for filing deadlines.
When it comes to taxes, having accurate records of your overall business earnings and expenditures will save you time, energy, and money. Ensure you record all your sales receipts, invoices, bank statements, and other tax-related documents.
Also, keep track of all your work expenses. For example, if you use your personal vehicle for work purposes, keep a record of the mileage driven and any related expenses. This information is vital because it can be used to deduct expenses when filing your taxes
Hiring accountants or business tax experts is beneficial under any circumstances. If your entity is new, these professionals can help lay the groundwork for managing your tax-related processes.
If you have a more established company, professionals can uncover ways to approach tax more smartly. Better yet, they can take the burden of tax calculation and submission off your hands.
Good accountants should be able to review your records for errors, suggest ways to reduce your tax liability, and help you comply with the government. They can also advise future tax planning to keep your taxes organized and get the most out of available deductions and credits.
Take advantage of tax credits
Tax credits allow your business to reduce its taxes. Many different tax credits are available, such as the Work Opportunity Tax Credit (WOTC) or Low-Income Housing Tax Credit (LIHTC).
Other credits include Research and Development Tax Credits, Renewable Energy Tax Credits, and Employee Retention Credits.
These tax credits can be precious for businesses. Apart from saving you tax dollars, they can help your business grow and thrive.
Stay up to date
Tax laws are constantly changing, so staying up-to-date with the latest regulations and policies is essential.
Make sure to check the IRS website periodically for any updates or changes. At the same time, consult with a tax professional to ensure you are compliant.
Additionally, many cities and states have their own tax policies and laws. So be sure to check with your local government offices for more specific information about business taxes.
When it comes to business taxes, it is essential to plan ahead. Estimate your business earnings and expenses for the year, to accurately budget and plan.
Also, keep accurate records of all your financial transactions in case of an audit by the IRS. This will help ensure you pay the appropriate taxes and make filing easier.
File on time
A surefire piece of financial advice that can help avoid any tax-related headaches is making sure you file your taxes on time. Depending on the type of entity you run, this could mean filing a quarterly or annual return. It is vital to stay up-to-date with specific filing requirements and the deadlines for each type of tax.
Consider tax planning strategies
Tax planning is an integral part of any successful venture. You can optimize your cash flow and streamline the filing process by having a plan to minimize taxes.
Talk to experienced tax professionals about strategies that could reduce your overall tax burdens, such as utilizing deductions and credits, taking advantage of deferral opportunities, or investing in research and development.
Review your tax return
It is a good idea to review your tax return before submitting it and processing the payment through the relevant payment gateway or bank transfer. Even if you have utilized the services of an accountant, mistakes can still happen. Carefully read through each line item to ensure all of the information is accurate and there are no typos or other errors.
Keep track of your business taxes with Payoneer
With Payoneer’s all-in-one payments solution, you can manage and track your invoices, payment requests and even send reminders to your clients. When it comes time for filing those taxes, you’ll have everything in one consolidated place. You can also use Payoneer to make tax payments in multiple currencies. Our global payments platform makes it easier for you to stay on top of your tax obligations and comply with local regulations.
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