Business Taxes

There are several types of business taxes, and the ones you must pay depend on how your business is structured. You must also consider whether your business is taxed at the state and local levels. Federal business income taxes are usually based on the profit your business makes, but they also consider certain deductions. In addition to a corporate income tax (CIT), your business may have to pay other types of taxes, including state and local sales or property taxes. Depending on where your business is located, you might also be subject to a franchise or excise tax. Generally, C corporations pay a CIT of 21%, while pass-through businesses—including sole proprietorships, partnerships, and LLCs with only one owner—pay at their individual federal income tax rates, which can vary from 2.5% to 11.5%.

Who Must Pay Business Taxes?

Most small businesses must pay several different kinds of taxes. Some are federal, some are state or local, and some are based on specific business activities such as selling taxable goods and services, using certain equipment, renting or owning real estate, and having employees. Some of these taxes are due throughout the year, and others depend on whether your business made a profit or not.

Your federal tax obligations depend on how you structure your business. For example, a sole proprietor or partner in a partnership is taxed on their share of the partnership’s net income, while a corporation pays a flat 21 percent rate on profits. If you have employees, the IRS may require you to withhold employment taxes from their paychecks. These taxes typically include Social Security taxes, Medicare tax, and unemployment insurance.

Depending on your business is location, you might also have to pay state or local taxes. These taxes might be a sales tax on the products or services your business sells, property taxes on the company’s facilities or land, or a franchise tax that’s charged to companies doing business in the state.

Estimated taxes are due quarterly, and employment taxes are usually withheld on a monthly basis based on payroll. Check with your state and local tax agencies for more information. If you are a corporation, use form CO-414, Corporate Estimated Tax Payment Voucher, to make estimated tax payments.

How to Calculate Business Taxes?

Regardless of the way a business is organized, its tax liability starts with calculating the company’s taxable income. To do this, accountants must first determine the company’s gross revenue, which includes all earnings, such as sales, interest, and profits from the sale of assets or investments. Subtracting allowable expenses and deductions from the gross revenue will yield the taxable income.

While the method used to calculate a business’s taxable income may differ depending on how the company is structured, most companies follow a similar formula. To begin, the accountant must determine the company’s gross revenue, which is equal to all revenues received during the tax year, factoring in allowances and returns. This figure is then multiplied by the company’s tax rate.

For most small businesses, this is the only federal income tax calculation that needs to be performed. This is because non-corporate small businesses, such as sole proprietorships and partnerships, are taxed at their owner’s personal income tax rate. Salaried employees also pay self-employment taxes, which include Social Security and Medicare.

For most small businesses, the best option is to use an online business income tax calculator to estimate the total business income tax owed. This will save time and money, as estimating the correct amount of tax owed will help ensure that the business is not overpaying or underpaying. Additionally, the business can plan accordingly and avoid paying fines when filing its quarterly estimated taxes.

QBI Deduction

The Tax Cuts and Jobs Act of 2017 included a new business income tax deduction that reduces the top marginal business tax rate to 21%. This deduction can significantly lower the cost of doing business for many small businesses. However, it’s important to understand the nuances of this new tax break before you start taking advantage of it.

The new qualified business income (QBI) deduction is a sizable tax break for owners of pass-through businesses such as partnerships, LLCs, S corporations, and sole proprietorships. QBI is defined as the net amount of all qualified items of income, gain, deduction, and loss from a taxpayer’s qualified trade or business. It does not include compensation paid to an S corporation owner-employee or guaranteed payments to partners, and it also excludes rental income (as long as it qualifies as business rental income), investment items such as capital gains and losses, interest, and dividends, and unrelated business income tax (UBIT) income from real estate investment trusts and qualified cooperatives.

The QBI deduction is only available to taxpayers with qualifying business income and who either itemize their deductions or take the standard deduction. The deduction can’t exceed 20% of taxable business income minus the net capital gain. Additionally, certain service-based businesses face steep phaseouts if their taxable income exceeds $163,300 for single filers or $326,600 for married filers. If your business income is above these thresholds, you may need to limit the amount of the deduction to 50% of W-2 wages plus 2.5% of the qualified property-basis limit.

Small Business Taxes

As a small business owner, you’ll need to keep track of all your earnings, including business profit, which is the difference between your gross revenue and expenses. You must report all of this information to the IRS, and you’ll need to determine the correct filing status for your company.

Small businesses are categorized into two groups: C corporations and pass-through entities. C-corps are taxed at a flat rate of 21%, while owners of pass-through entities are taxed individually on their business net profits. In addition, some states levy an individual income tax on high-income taxpayers.

If your company is a C-corp, you’ll need to file Form 1120S and pay employment tax for every employee you have. You’ll also need to set aside money for any unearned income, such as dividends and interest. You’ll also need to decide if you will use a calendar or fiscal tax year. Choosing the right tax year can have an impact on your business, so check with the IRS for detailed rules about filing and paying taxes.