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.
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.
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.
Types of small business taxes
Small 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
However, here are the tax types that apply solely to small businesses.
Partnerships 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.
The 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 taxes
This 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 accountant
Because 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.
Exercise tax precautions to forestall mistakes
Even though you have an accountant handling your taxes for you, some solo responsibilities still apply. For instance, you might want to pay estimated taxes quarterly to forestall any errors that could result in harsh penalties.
Also, proper financial record keeping is critical for the sake of evidence in case you run into some problems that could warrant tax auditing.
You could also seek legal ways to lower your tax bills and reduce the weight of small business taxes on your growing enterprise.
If you plan carefully as a small business owner, you can reduce your taxable income and have your money work more for you. However, you must ensure that the steps you apply are legally acceptable to avoid falling short of the law. Additionally, there are loads of tax professionals to help you make better decisions that serve your best interest.
FAQS: How much can a small business make before paying taxes?
How much can a small business make before paying taxes?
Generally, state laws and small business associations can influence what a small business pays as taxes according to statutory rules. However, the popular opinion is that many have to earn above $400 to become taxable.
Can I run a business without paying taxes?
You may not need to pay taxes if your net business income is Zero and below. However, you will still have to file a return with the IRS, even if you generate no income. Essentially, if you initially do not owe the IRS before filing, there is likely to be no penalty for you if you do not file.
How much tax do you pay if you are self-employed?
Generally, the tax rate for self-employment is 15.3%. Usually, the self-employment tax comprises 12.4% for social security like disability insurance, survivors and the elderly, and the remaining 2.9% for Medicare which includes hospital insurance.