All the Taxes Your Business Must Pay
Just like an individual, businesses must pay several different kinds of taxes, some 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.
If you are just starting your business, you need to know what taxes you'll be expected to pay. If your business has changed—if you have bought property or started hiring employees, for example—you'll need to know about the taxes associated with these activities.
All businesses must pay tax on their income; that is, the business must pay tax on the profit of the company (the income of the business less deductible expenses). How that tax is paid depends on the form of the business.
Small businesses (sole proprietors and single-member LLCs), partners in partnerships, and S-corporation owners pay taxes through their personal income tax returns. The concept - called pass-through tax - is the same for all of these business types.
Sole proprietors and single-member LLC members pay taxes by filing a Schedule C included with their personal return
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 their share of the income of the business, by including this income in their personal returns.
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, report, and pay state sales tax.
Merchants in most states are required to collect sales tax and pay it to the state 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, which many states now are requiring for specific types of sellers.
If your business owns real property (real estate), like a building, your business 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, same as for personal property like a house. There are special considerations for paying property taxes when you sell a piece of business property (capital gains taxes may have to be paid, and you should consult with a tax professional for such matters.
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.
Self-employment taxes are those paid by sole proprietors and partners for Social Security and Medicare, based on the income of the business.
Because business owners are not employees, there is no pay to withhold these taxes from, so self-employment tax is the alternative.
LLC owners also must also pay self-employment tax. Owners of corporations who work as employees do not have to pay self-employment tax.
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 tax 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 July 15, September 15, and January 15 of the following year.
The estimated tax form for business owners combines business and personal income and taxes, including self-employment taxes.
Like sales taxes, some employment taxes are collected, reported, and paid. In this case, the taxes are paid to the IRS and the Social Security Administration.
Employment taxes are those paid by the owner of a business for several types of taxes based on the gross pay of employees. These include FICA taxes (for Social Security and Medicare), federal and state unemployment, and federal and state workers compensation taxes.
Some of these taxes (unemployment tax, for example) aren't collected from employees, and they must be paid completely by the employer.
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 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 are exempt in some states.
Sole proprietorships are usually exempt from paying gross receipts taxes, but not from state income tax.
Corporations and LLCs are most likely to pay gross receipts taxes, determined by the fiducairy laws of the state in which they are located.
Some states charge franchise taxes to corporations based on the value of the company. These taxes are similar to a state income tax or a gross receipts tax. Sole proprietorships are not typically subjected to a franchise tax.
If you are an owner of a corporation, you are a shareholder. That means you pay income taxes on income you receive from dividends.