Getting a Handle on Your Business Taxes
For many individual taxpayers, determining their tax bite is as simple as plugging numbers into the latest version of their tax-preparation software. But for many business owners, filing taxes is something better left to a well-qualified accountant with solid business experience.
However, even if you seek an accountant's expertise, you'll still want to know the basics: How does the IRS assess business taxes? What types of taxes should you be considering during tax time and year-round. Also, how can you manage your tax tab without too much pain?
What's your business structure?
The IRS assesses business income taxes and self-employment taxes by business type:
Sole proprietorships file their business taxes as part of Form 1040, their personal tax return. This is called pass through taxation. In addition to paying tax on profits at their current tax rate, sole proprietors also pay a self-employment tax. For Tax Year 2023, this tax comprises a 12.4 percent Social Security allocation and a 2.9 percent Medicare contribution, for a total of 15.3 percent.
Single-member LLCs, like sole proprietorships, usually pay taxes through the owner's personal returns. Multiple-member LLCs pass through profits to each owner's personal tax returns; each partner also pays the self-employment tax. Form 1065, what the IRS calls an informational tax return, reports the LLC's total income and expenses.
An S-Corporation files its own return, separate from the owner/owners' Form 1040 returns. However, even though the S-Corp is a wholly separate entity, its profits are typically passed through to the owner's personal return, just like the aforementioned business types.
A C-corporation also files its own return. The IRS currently taxes C-corporation profits at a flat rate of 21 percent.
Some businesses start out using one of these models but shift to a different structure as they evolve. For example, a mountaineer may start a sole-proprietorship business doing guided climbs. But as the business gets more popular, adds staff, and increases costs, an LLC or an S-Corp may now be more tax-efficient and reduce the owner's liability, should there be a legal issue. Check in with your accountant periodically to discuss what works best for your business needs.
Did you know?
The IRS offers Recommended Readings for Small Businesses, a free library of downloadable small-business manuals. These cover everything from how to set up your business records and making appropriate deductions to guidance in case of a natural disaster or theft.
What other taxes may come into play?
Employment Taxes. Your business must pay into the Federal coffers that provide Social security and Medicare retirement benefits. Additionally, Federal unemployment (FUTA) taxes fund unemployment insurance programs. State-level unemployment taxes vary.
Excise Taxes support federal funding in a particular business category or may act as a social measure on certain industries. For example, vehicle manufacturers pay into funds allocated to improve the nation's transportation infrastructure. Likewise, alcohol, tobacco, firearms, and even indoor tanning businesses pay excise taxes on their products, which the general public can misuse and abuse. Some of these proceeds go to public awareness and education initiatives. IRS Form 720 further details excise-tax conditions.
Sales tax. Forty-five states, along with the District of Columbia, levy sales taxes, with businesses being responsible for their collection. Goods and services assessed this tax vary by state. In New Jersey, for example, clothing retailers are exempt from charging sales tax. However across the border in New York, clothing purchases above $110 are subject to state sales tax.
State and local business taxes. Your state, county, or even city may assess business taxes. Nevada, for example, has no business tax. However the City of New York imposes a corporate tax, ranging from 4.4 percent to 9 percent, depending upon the business category.
Taking the pain out of paying your taxes
Sometimes, you may have miscalculated what you owe this year and need some help in paying your bill. Several funding options can help you pay your taxes on time without hurting day to day operations.
Small business loans, either short- or longer-term, can get your taxes paid without compromising your cash flow.
Revenue advances. You can use these to pay for taxes or other business expenses. With this type of financing, you agree to make payments based on a percentage of your revenue going forward.
Installment loans typically come in a lump-sum payout. You arrange to pay the loan back in fixed increments at a fixed or variable interest rate.
When you take the time to understand how each of these taxes work, you're saving the expense of penalties and interest for unpaid tax bills, along with some anxiety. You're also ensuring that in the future, your business is as tax-efficient as possible.
Learn more about...
The Best and the Worst Business Tax Climates
The Tax Foundation, a non-profit tax policy research organization, offers an annual guide to states with the best and worst business-tax climates. This year, Wyoming is a winner, and New Jersey... well, find out for yourself here.
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