All businesses must pay several different kinds of taxes, and some are easier to understand than others. Taxes for businesses come in several varieties: federal, state, and local.
There are also different types of taxes, depending on various business activities, like selling taxable products or services, using equipment, owning business property, being self-employed versus having employees, and of course, making a profit.
The IRS extended the deadline for personal income tax returns, including self-employed individuals, to May 17, 2021. Typically, independent contractors, freelancers, and small business owners file with their individual tax return, due April 15. However, estimated quarterly taxes are still owed on April 15.
For example, if you are an independent contractor, freelancer, or small business owner, you aren't an employee, so the money you take out of the business isn't a paycheck. You pay taxes on your share of the profits of the business.
If you are just starting your business, you need to know what taxes you'll be expected to pay. If your business has changed—for example, if you have bought property or started hiring employees—you'll need to know about the taxes on these activities.
Business taxes usually need to be filed in the spring. However, businesses in Texas have been granted an extension for filing their 2020 taxes due to the winter storm emergency. If you are located in Texas or another area that received a similar FEMA disaster declaration, you have until June 15, 2021, to file your 2020 taxes.
Income Taxes for Small Businesses
All businesses must pay tax on their income; that is, the business must pay tax on the profit of the company. How that tax is paid depends on the form of the business.
Most small businesses are pass-through entities, which means that the gains or losses are passed through to the owners on their personal tax returns.
Income taxes and self-employment taxes (Social Security/Medicare tax) are based on the net income of your business for the tax year. It's the same thing as profit (income minus expenses). If you share a business with others, the net income is divided between or among the owners, based on their agreement.
Sole proprietors and single-member LLC owners pay income tax based on the net income of their business.
To determine the net income, you'll need to complete Schedule C as part of your personal tax return. The net income from Schedule C is added to your other sources of income to determine your total tax.
Partners in partnerships and multiple-member LLC owners file a partnership business tax return for information purposes only.
The individual partners or LLC members pay income taxes for their share of the income of the business. They receive a Schedule K-1 showing their income from the business, adding this schedule to their personal tax returns.
Owners of LLCs are taxed as either sole proprietors (one owner) or partnerships (multiple owners). Some LLCs can elect to be taxed as a corporation (see below).
S corporations are similar to partnerships. Owners of S corporations divide up the income of the business, and each owner receives a Schedule K-1 to include in their income tax return.
Effective for 2018 and forward, you may be eligible for a new 20% tax deduction, called a Qualified Business Income deduction, in addition to your normal business expense deductions. This deduction is for sole proprietors, partners, LLC owners, and S corporation owners. The deduction may also be claimed on certain dividends for corporate shareholders.
Income Taxes for Corporations
The net income from the corporation isn't taxed unless it's distributed by the company to the shareholders, usually in the form of dividends. The profits kept in the corporation are classified as retained earnings.
Self-Employment Tax on Each Owner's Share of Business Income
Self-employment taxes are those paid by sole proprietors, partners in a partnership, and LLC owners for Social Security and Medicare, based on the net income of the business.
Owners of corporations are shareholders; they aren't self-employed. S corporation owners aren't considered self-employed and don't pay self-employment taxes.
Self-employment tax is paid on the net earnings of the business. No net earnings for a year means no self-employment tax. It also means you don't get Social Security/Medicare credits for that year.
You must calculate self-employment taxes using Schedule SE and add the total of this tax due to your personal tax return.
Estimated Taxes for Business Owners
Because you are the owner of a business, no one withholds income tax and self-employment tax from the money you take out of the business. (You don't get a paycheck, remember, because you aren't an employee.)
The IRS requires that these taxes be paid throughout the year, so you must pay estimated taxes quarterly. The first payment of the year is due April 15, then again on June 15, September 15, and January 15 of the following year.
Businesses located in Texas and other areas affected by severe winter storms also received an extension on filing their 2021 estimated tax payments as a form of disaster relief. Estimated income tax payments due on April 15, 2021, as well as the quarterly payroll and excise tax returns normally due on April 30, are both due on June 15, 2021.
The estimated tax form for business owners combines business and personal income and taxes, including self-employment taxes.
Sales Tax on Products and Services Sold in Certain States
Businesses don't directly pay sales tax on products and services they sell. But if your business operates in a state that has state income tax, you must set up a system to collect sales tax from your customers and report and pay that tax to your state.
Merchants in most states are required to collect sales tax and pay it to the state's department of revenue.
Specific products and services are sales-tax eligible, depending on state laws. Money must be collected from customers, reported, and paid on a regular basis.
Don't forget sales taxes for items you sell online. A recent U.S. Supreme Court decision allows states more freedom to collect sales taxes from online sellers located in their state. That means you may need to charge your online customers sales tax and pay it on a regular basis.
Property Tax on Business Property
Property tax is a local tax. If your business owns real property (real estate), like a building, it must pay property tax to the local taxing authority, which is usually the city or county where the property is located.
The tax is based on assessed value, the same as for personal assets, like a house.
There are special considerations for paying federal taxes when you sell a piece of business property. You may have to pay capital gains taxes on the difference between your initial cost and the selling price.
Always get help from a tax professional before you sell business property.
Excise Taxes on Use and Consumption
Excise taxes are paid by a business for certain types of use or consumption, like fuels, and other activities like transportation and communication.
Excise taxes are paid to the IRS, either quarterly or annually, depending upon usage, using Form 720.
Employment or Payroll Taxes Paid on Employee Earnings
Employment taxes are taxes paid by employees and employers, including:
- Federal income tax withholding from employee pay
- FICA taxes for Social Security and Medicare, paid by both employees and employers
- Federal unemployment (FUTA) taxes, paid by employers
There are several steps to this process, for federal income taxes and FICA taxes:
- Calculate federal income taxes and both the employee and employer portions of FICA taxes based on the employee's gross pay.
- Withhold these taxes from employee paychecks.
- Pay these taxes to the IRS, including your portion of FICA taxes as an employer, by depositing the total amount monthly or semi-weekly, depending on the size of your payroll.
- Report amounts owed and paid quarterly on IRS Form 941, and pay any additional employment taxes due.
Unemployment taxes are separate; they are paid entirely by employers, not employees. The amount you must pay as an employer is calculated based on a portion of the income of your employees.
Gross Receipts Tax and State Income Tax on Businesses
Most states have a state income tax for businesses. But some states, like Nevada and Texas, impose a gross receipts tax on businesses instead of, or in addition to, a state income tax.
In these states, gross receipts (revenues) of the business are taxed. Some states allow deductions for this tax, and some types of businesses in some states don't have to pay this tax.
Sole proprietorships are usually exempt from paying gross receipts taxes but not from state income tax.
The Tax Foundation has a list of states that charge gross receipts taxes and the rates. Check with your state to see if you must pay this tax. Most small businesses pay state income tax on business income through their tax returns, similar to federal income taxes. The Tax Foundation has a list of state individual income tax rates and state corporate income tax rates.
Dividend Tax on Corporate Shareholders
If you are an owner of a corporation, you are a shareholder. That means you pay income taxes on any income you receive from dividends. Each corporation decides when to pay dividends and how big the dividend will be.
Dividends are not considered earned income, and you must pay a special dividend tax rate on dividends you receive, through your personal tax return.
You will receive a 1099-DIV form with the amount of the dividend paid that year. You must include that information on the appropriate form, depending on the type of dividend and how long the dividend was held.
Federal Tax Due Dates:
The specific due dates for federal income taxes and employment taxes may change each year, depending on weekends and holidays. See this article for federal tax due dates for the current year, including extended returns and estimated tax payments. You can also see a tax calendar for the year, including payroll taxes. If you aren't sure whether you are impacted by a disaster situation, you can check with the IRS to see whether your area qualifies for tax extensions or other relief.