In full preparation for tax season, we’re covering all topics tax-related. With everything else that happened last year, tax season will probably be more stressful than usual. So, we’re trying to ease that stress by planning ahead and covering everything about taxes our clients could ever want to know! Next up in our tax coverage, we’ll learn all about small business taxes.
Last week, we covered tax planning for businesses and how your business can best begin planning. This week, we’ll continue on the path of full tax coverage by explaining the differences between the most common types of small business taxes. According to the IRS, there are five types. So, let’s start by diving into what’s included within these taxes.
What’s Included in Small Business Taxes
Business taxes are a broad topic overall. There are many different parts and pieces that work together to create a whole. Once you break each tax down, the whole picture becomes easier to understand. So, let’s start breaking it down.
The type of business you have helps determine the taxes you’re responsible for. There are income taxes, estimated taxes, employment tax, self-employment tax, and excise tax. In this article, we’ll cover these five categories of small business taxes.
These five categories are:
- Income Taxes: An income tax that is paid throughout the year, depending on your business structure. The Small Business Administration explains business structures here.
- Self-Employment Taxes: This type of business tax withholds Medicare and Social Security taxes and includes the self-employed in these programs.
- Estimated Taxes: When you don’t pay income taxes via withholding methods, or, if not enough self-employment tax has been withheld, estimated tax payments come in.
- Employment Taxes: The most common, there are various taxes that combine to calculate employment taxes.
- Excise Tax: Various taxes that apply to different business industries in specialized areas.
As you can see, there are many factors that come into play when calculating business taxes. Now let’s take a deeper look into the first item on our list of small business taxes – income taxes.
We’ll start with the area of taxes we’re all most familiar with – income taxes. These are the employer side of income taxes that millions of Americans pay every year. All businesses must file an annual income tax return, just as all individuals must file every year. The only business that doesn’t file an annual return is a partnership (they still file, just in their own way).
Business income taxes are paid throughout the year – also known as “pay-as-you-go taxes.” The amount of tax is calculated as the business earns income. If there isn’t enough withheld from your income taxes (or if you don’t pay your income taxes in the typical withholding method, you may have to pay estimated tax payments as well. We’ll get into estimated taxes and what they entail later on.
As we’ve mentioned, your business structure determines how you’ll pay your income taxes. Along with taxes, your business structure can also determine the type of form used when filing your small business taxes. So, you should learn about your business’s structure if you’re unfamiliar. The next type of small business taxes on our list are self-employment taxes.
Put simply, self-employment taxes are employment taxes for the self-employed. The self-employment tax is not the same as the previously mentioned income taxes. This small business tax is applied to your net earnings or “profits,” depending on your type of self-employment. This tax is made up of Social Security (OASDI) and Medicare taxes. These payments help to cover (and include) these self-employed individuals in the social security program.
“Regular” employees usually split the bill for employment taxes with their employers. If you look at an employee’s check stub, you’ll see two contributions to Social Security and Medicare taxes of 7.65%. If you’re a business that hires regular ol’ employees that is.
This is because the employee pays their portion, and the employer then pays a matching 7.65%. However, the self-employed pay an entire 15.3%. The 15.3% self-employment rate is calculated a little differently than regular employment taxes.
The rate is calculated by combining the Social Security and Medicare tax rates to equal the total 15.3%. The tax rate for Social Security (OASDI) insurance is 12.4%. The tax rate for Medicare is 2.9%. This brings you to a total of 15.3%. So, who has to pay this 15.3% self-employment tax?
Who Pays Self-Employment Tax?
The forms for filing self-employment taxes (Schedule SE) are called Form 1040 or 1040-SR. There are two qualifiers that make you eligible to pay the self-employment tax. First, if your self-employment results in earnings of $400 or more, you must pay self-employment taxes and file. This amount excludes church employee income.
Church employees earning an income of $108.28 or more are also subject to the self-employment tax and filing Schedule SE. If you have a business entity for your self-employment, you’ll use a different form. For example, a sole proprietor would use a Schedule C instead for their earnings.
If you have income that isn’t subject to a withholding tax already, you’ll need to use what are called estimated taxes – which we’ll cover now. So if you’re interested in learning about how estimated taxes work, keep reading!
Our next type of small business taxes makes up for the instances when taxes aren’t properly withheld. Meaning, this type of tax is used on income amounts that aren’t subject to withholding. The IRS states that this “includes earnings from self-employment, interest, dividends, rents, and alimony.”
Estimated taxes must be paid throughout the year, quarterly. There are a few qualifying factors that would make someone qualify to pay these estimated taxes.
- You must be a freelancer, independent contractor, or small business owner
- You expect to owe a minimum of $1,000 in taxes
If you don’t pay your estimated taxes (and qualify to pay them), there could be penalties. There are due dates to follow, so make sure to take note of them if this applies to you.
The deadlines for paying these quarterly taxes are the 15th of the month following the last month of the quarter. Here is the Form 1040-ES that the IRS gives to individuals filing estimated taxes. Now that we’ve covered what self-employment and estimated taxes are, let’s jump into the most common on our list of small business taxes – Employment Tax.
Employment taxes apply to businesses with employees. It includes Social Security and Medicare taxes, Federal Income Tax withholding, and Federal Unemployment (FUTA) Tax. All of this withheld together are employment taxes.
Employers must properly withhold these taxes from their employee’s paychecks each pay period. They then have to pay their side of taxes along with the withheld employee taxes. This is done by properly filing and depositing these amounts with the IRS. There are depositing guidelines businesses must follow.
The excise tax is one of the lesser-known small employment taxes. The excise tax applies to specific situations. Excise Tax applies to the manufacturing or selling of certain products and/or operating certain types of businesses. Your business can also be subject to the excise tax for using certain equipment, facilities, or products. The final qualifying factor for this tax is by receiving payment for certain services.
There are some specific forms that accompany these qualifying factors for the excise tax. We’ll give a quick summary of the forms to better understand who these types of taxes apply to. Form 720 includes things like environmental taxes and fuel taxes. Form 2290 accounts for the use of certain trucks and equipment on public highways. There is also Form 730 and Form 11-C that apply to businesses registering “wagering” for lotteries or other similar activities.
Now that you’ve learned about the five different types of small business taxes, let’s end with finding help with filing those taxes.
Small Business Tax Help: Finding A CPA
When filing your small business taxes, it’s smart and helpful to work with a CPA. A Certified Personal Accountant will help you file your taxes, find all available credits, and will do so accurately. CPA’s are experts in this field, so utilize that knowledge to your advantage.
When looking for a CPA, make sure to find one with experience – specifically experience with businesses similar to yours. If you own a restaurant, find a CPA that’s familiar with tip reporting. Match your CPA’s skills with your business’ needs. Ask fellow business owners if they work with any CPA’s they’d recommend.
If you can find a local CPA to work with, even better! This way, they’ll know all about your state, local, and city taxes. While any CPA can help you understand and file your small business taxes, the perfect CPA match may even make you look forward to tax season!