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Understanding Business Tax Basics

People aspiring to become small business owners must familiarize themselves with the various federal, state and local business taxes that their enterprises will be subject to.

The system of taxation on business operations is complicated, especially for businesses that have employees. Understanding and complying with business tax law is not one of the more pleasant tasks for an entrepreneur, but calculating taxes incorrectly or failing to remit them on a timely basis to the applicable taxing authority will result in serious penalties.

For a fledgling business, or for one struggling to turn a profit, avoiding a substantial tax penalty can mean the difference between solvency and bankruptcy. Because the stakes are so high, many small businesses rely on business tax specialists to help them navigate the tax code and properly file their returns.

At the federal level, business taxes fall into four categories, although not all of them will apply to all companies:

1. Income tax – The profits of a business venture are subject to taxation by the IRS. Unlike corporate taxes levied on large limited liability companies, however, small business taxes are more likely to be accounted for on the personal income tax returns of an individual sole proprietor, the partners in a partnership or the shareholders in an S corporation.
2. Self-employment tax – The self-employment tax (SE tax) is method by which the IRS collects Social Security and Medicare contributions from self-employed persons. This is separate and distinct from the income tax paid on the profits that a business generates for its owner or owners. Unlike Social Security and Medicare taxes that are withheld from each employee paycheck, SE tax is estimated and remitted quarterly.
3. Payroll taxes – In addition to withholding income taxes from their employees’ pay, employers must deduct employees’ Social Security and Medicare contributions. The employer also pays a share into the Social Security and Medicare programs from its own funds. In addition, the employer alone pays federal unemployment insurance tax.
4. Excise taxes – Only certain kinds of businesses have to pay federal excise taxes, which are levied on specific products and services. The most familiar examples are gasoline and other fuels, alcohol and tobacco products. Federal excise tax is also paid by companies that operate heavy trucks on highways. Some other business activities subject to excise taxes include the manufacture of fishing and archery equipment and the provision of indoor tanning services.

States and localities impose taxes on business, too. Almost all states have a business or corporate tax. All states require employers to pay taxes for state workers’ compensation insurance and for unemployment insurance. Five states and Puerto Rico also require a business to pay for temporary disability insurance. And, of course, employers must withhold and remit their employees’ state income tax, except in the few states that don’t impose an income tax on their residents.

In addition, almost every state collects a sales tax on some or all retail transactions. States and localities can also impose excise taxes on selected products or services.

The professionals at PADGETT BUSINESS SERVICES® Services provide small business tax preparation services for business owners who want to make sure that their taxes are done right. We can also assist with your business financial planning, including tax planning. Padgett also provides a range of other small business services such as bookkeeping, consulting and payroll.