Business taxes for starters

If you are starting your own small business one of your biggest concerns is probably how you will have to pay taxes. And if it is not, it should be. Complying with and using the tax laws to your advantage is one of the best ways to ensure your business is successful. As a general introduction, new small business owners should be aware of the following five types of taxes: Income tax, self-employment tax, employment taxes, excise taxes and sales taxes. This is not a complete list of the taxes that you will face, but it is a good place to start. Let’s take a look at each of these taxes in further detail:

Income tax

The business entity that you have chosen will dictate how you report your income taxes. All businesses except for partnerships must file an annual tax return with the IRS and the state that you do business in, assuming that state collects income tax. Partnerships file an information return. An information return notifies the IRS of the partnership’s activities for the year. Sole proprietors, partners, shareholders and S corporation’s pay income tax by making regular estimated tax payments during the year. Different rules regulate each of these entities in regard to their income tax payments, so be sure to research your particular business form.

Self-employment tax

If you work for yourself this tax combines your Social Security and Medicare taxes. Your self-employment tax contributes to your coverage under the Social Security system. Social Security provides you with certain benefits such as retirement benefits, disability benefits, survivor benefits and medical insurance benefits. You generally have to pay self-employment tax if your annual net earnings from self-employment are greater than $400.

Employment taxes

Employment taxes generally consist of the following:

  • Federal income tax withholding
  • Social Security and Medicare taxes
  • Federal unemployment (FUTA) tax

Federal withholding

Businesses must withhold federal income taxes from an employee’s wages. To determine how much federal income tax to withhold from each wage payment, you need the employer’s Form W-4.

Social Security and Medicare withholding

Employers must withhold part of these taxes from your employee’s wages and you pay a matching amount yourself.

Federal unemployment (FUTA) tax

The federal unemployment tax pays unemployment compensation to workers who lose their job.

Excise taxes

If you manufacture or sell certain types of products, operate certain types of businesses or use various types of equipment you may owe excise tax. Most small businesses do not fall into these categories, but those that do include retail sales of heavy trucks, guns, tobacco and alcohol products.

Sales taxes

If you live in a state that imposes sales tax and your business sells retail products then your business is usually responsible for collecting and paying that tax. The tax is computed on the product’s sale price, not on your net profits.[1]

[1] Harrock, Richard D., Small Business Kit for Dummies (Wiley Publishing Inc. 2004).