Employees usually have their taxes withheld, making it easier to stay on top of filing and payment. But that does not seem to be the case with small business owners who have to pay small business taxes. As a result, tax management for small business owners can be pretty challenging when dealing with everything by yourself.Filing taxes as an entrepreneur can be both discomforting and exhausting, especially for young entrepreneurs who are still new to the system. Therefore a proper understanding of your federal, state and local tax obligations can make your tax situation a breeze.Every business must file returns and pay business taxes at both the federal and state levels, including in the state where it was formed as well as any other state where it does business. Your company may also be liable for collecting and remitting taxes paid by others to the government. Each firm has unique requirements that are defined by its business activity, geography, and other factors.Businesses are sometimes unaware that they must register in order to collect and pay these business taxes. Failure to register might result in fines and penalties. Because each jurisdiction is unique, it is critical to understand the local requirements. This is also true for internet and home-based enterprises. Doing business only over the internet does not usually free your company from paying local taxes.In this guide blog post, you will come to terms with the nuances of taxation. Also, you will learn how to manage your small business taxes without getting in trouble with the government tax authorities.
What are small business taxes?They are money paid to the government on income and earnings from small business owners. Several criteria influence the definition of what a small business should be, from state laws to small business association (SBA), etc. However, there is a general acceptance that a small business should not have more than 50 employees.According to the SBA (small business association), most small businesses pay an average of 19.8% on taxes. Similarly, a small company with single ownership might pay up to 13.3% on the tax rate, while a business with more than one owner might pay an average of 23.6% on taxes.
Taxes that you may be required to collectSales tax is a tax levied on the retail sale of many forms of tangible personal property, as well as services, rents, entry fees, and other intangible commodities.Employers must pay an unemployment tax in order to get unemployment insurance and support compensation programs.Use tax: A tax levied on the use, storage, or consumption of tangible personal property not subject to sales tax.Withholding tax: Businesses that employ workers in states that have an income tax must deduct this tax from their earnings.Hiring staff subjects a small firm to various business taxes. To calculate unemployment and withholding taxes, it is critical to understand the state definitions of employment. Finding the correct application after deciding which taxes must be paid is not always straightforward. The application process for payroll tax registration in each state differs substantially.
Why should small businesses pay tax?Small businesses should pay tax because they utilize government infrastructure to run their business. Essentially, it establishes a pact between the government and the business owner- the social contract theory. However, governments exercise fairness with tax policies by allowing businesses to pay taxes according to their revenue-generating capacity. Through taxation, the government is held accountable for fulfilling its obligation to society, including small business owners.Now that you know a little about small business taxes and their relevance how about learning the types of taxes for small businesses? Below are the tax types that apply to you as a small business owner.
Why are tax rates and administration important?Governments require long-term funding for social programs and public expenditures to foster economic growth and development. Health, education, infrastructure, and other services programs are critical to achieving the shared aim of a wealthy, functioning, and harmonious community. They also want governments to raise their revenue. Taxation not only pays for public goods and services; it also plays an important role in the social compact that exists between citizens and the economy. The way business taxes are collected and spent may define a government's legitimacy. Holding governments accountable encourages efficient tax administration and, more broadly, competent public financial management.All governments require money, but the problem is to select not just the amount of tax rates but also the tax base with care. Governments must also create a tax compliance system that does not discourage taxpayer participation. According to recent business survey data for 147 economies, corporations perceive tax rates to be one of the top five limitations to their operations, and tax administration to be one of the top eleven. 2 Firms in nations with higher Doing Business ease of paying business taxes indicators regard tax rates and tax administration as less of a barrier to business.
Types of small business taxesSmall business taxes fall under business taxes; the type of taxes you pay depends on your business's form and structure. It means that you must meet up with federal, state and local tax obligations to keep a clean slate with the law.Generally, there are five types of taxes for business which include:
- Income tax
- Self-employment tax
- Estimated tax
- Employer tax, and
- Excise tax
Income taxPartnerships are the only businesses that do not have to file an annual income tax return. The federal income tax operates on a pay-as-you-earn basis. Therefore, your small business yielding income is reason enough to pay your income tax. As a small business owner, you may need to file 1099 for no employment income, and online paystub generators like Paystubsnow provide a handy tool.
Self-employment taxThe SE tax directly affects you as a small business owner for working for yourself. Most businesses pay an average of 15.3% FICA tax for funding social security and medicare. So, while employees of the company pay 7.65%, the entrepreneur pays the remaining 7.65%.Essentially, the self-employed are responsible for the entire 17.3% FICA. However, most bosses deduct the remaining half from their tax returns.
Employment or payroll taxesThis type of tax applies to small businesses with employees under their payroll. While you can generate online paystubs for employee compensation with Paystubsnow, you can also generate w-2 forms for your workers as financial documentation to help them file their taxes.Now that you know the primary types of taxes you should pay as a small business owner, here is a short guide from paystubsnow on managing small business taxes.
Paystubsnow guide to small business taxes (how to manage small business taxes)
Get yourself a brilliant accountantBecause tax filing can be stressful, your goal should be to have them file all your taxes when you hire an accountant. That way, you free your mind to focus on running and growing your business. Essentially, the accountant can be under your payroll as an employee or function as an independent contractor. While there are many accountants, you should look out for those specializing in small businesses.
Find out your Tax liability.Determining your tax liability should be the first conversation with your accountant. That way, you can obtain specific guides on tax management.Tax liability is different for several businesses. However, there is a general outline that includes:
- Structure of the business
- Business location
- Assets and
- The number of employees.