Small Business Tax Guide for Business Owners

Small business taxes—it's a little too easy to shove them to the bottom of your to-do list. You don't always want to deal with them, but as a business owner, you know you have to. 

Luckily, paying taxes and tax planning doesn’t have to be confusing.

Federal small business taxes come in all kinds of shapes and sizes, and depending on your business type and business structure, you may or may not be liable for certain taxes. But there are four types of federal taxes that you should definitely be aware of:

• Income tax

• Self-employment tax

• Estimated tax

• Payroll taxes

State business taxes vary across the nation, but we’ll touch on those, as well so you’ll be all set for tax preparation season.

What a business tax is

A business tax can be one of many kinds of taxes. The IRS divides business taxes into five categories:

1. Income tax

2. Estimated tax

3. Self-employment tax

4. Employment taxes (including payroll tax)

5. Excise tax

Not all small businesses or startups pay all these taxes, and we'll discuss which businesses owe which taxes later. For now, let's talk about how you file your tax once you know (or have at least estimated) how much you owe.

How small businesses pay taxes

Sorting through the various types of business tax your company must pay can be confusing, but actually paying your federal taxes is pretty easy. The Internal Revenue Services (IRS) requires you to pay employment taxes—the federal income tax you withhold from employees' paychecks, plus Social Security and Medicare taxes for both your employees and your business—through the Electronic Federal Tax Payment System (EFTPS). You'll need your Employer Identification Number (EIN)—the nine-digit number the IRS uses to identify your business—to enroll.

Small business owners can sign up for EFTPS at any time or simply make one-time guest payments. Any taxes that small businesses pay using EFTPS must be deposited monthly or semi-weekly.

The rules are different for quarterly estimated taxes. If you're self-employed or run a pass-through business, you'll use Form 1040-ES to calculate what you owe, then mail the payment voucher with a check or money order made payable to the United States Treasury—or pay electronically through EFTPS. (C corporations use Form 1120-W instead.) Still not sure how to file or when? Your accountant can walk you through it (and here is a guide on what you should bring).

If you don’t have an accountant, it could be a good idea to consider hiring one. Gusto’s data found that two-thirds of small businesses say their accountant makes them more productive, and owners increasingly want forward-looking guidance, not just tax prep or bookkeeping.

What taxes a small business has to file

The IRS's employment tax due dates page outlines what you owe under the employment tax umbrella:

• Federal unemployment taxes

• Social Security and Medicare taxes

• Federal income tax withheld from your employees' paychecks

Social Security, Medicare, and federal income tax withholding get reported and deposited on Form 941, filed quarterly. Federal unemployment tax has its own return—Form 940, filed annually. (If you run an agricultural business, you'll use Form 943 instead of Form 941, also filed annually.)

All of this falls under the employment taxes category we covered earlier—it's self-employment and excise tax where things get a little trickier.

We get into self-employment taxes later, so for now, let’s focus on excise taxes. As a business owner, you likely only need to factor in excise taxes if your company operates in commercial transportation or certain kinds of manufacturing. IRS Form 720 details the taxes—mostly for fuels, though also for other items including indoor tanning services and fishing equipment—some small businesses need to pay.

The taxes we’ve discussed here are just federal taxes. States and localities levy taxes on small businesses too—we’ll get into those later.

How much a business has to make to pay taxes

Any business with a profit must pay taxes. Even businesses with no profit still need to file tax returns to show why they earned no profit—you just won't owe any business taxes if you have none. Corporations that expect to owe at least $500 in estimated taxes (annual) need to pay quarterly estimated taxes.

The rules are a bit different if you're a sole proprietor or single-member LLC. Once your net profit hits $400 in a given year, you owe self-employment tax. You'll also owe income tax, and if you expect to owe $1,000 or more for the year, you'll need to pay quarterly estimated taxes too. Self-employment tax works the same way if you have a stake in a partnership or multi-member LLC—but not if you own an S corporation. As an S corp owner, you pay yourself a reasonable salary subject to payroll taxes, and the rest of your profit distributions skip self-employment tax entirely.

How federal income tax works for small businesses

Your business entity determines how you pay your federal income taxes.

Some businesses are pass-through entities, which means the profits of the company are passed on to the owners. That means the owners pay income tax on the business profits on their individual tax returns.

Keep in mind that profits don't equal what you draw out of your business. If your business profits $50,000, you'll be taxed on that entire $50,000 even if you only take an owner's draw of $30,000.

Pass-through entities are:

• Sole proprietorship

• Single-member LLC

• Partnerships/ Multi-member LLC

• S corp

If your business is a C corporation, there is also corporate income tax.

That means you'll pay income tax twice. The business itself is taxed on the profits, at a rate of 21%, and the owners themselves are taxed on dividends that have been distributed to them. This is known as double taxation. Kind of a downer, right?

We know that was a lot, so here's a handy chart to recap how federal income tax works for different business entities and what annual federal income tax forms you'll need to file to report your profits. (Remember that this is just a standard list, so you may have more forms to file based on your unique tax situation.)

Do I have to pay self-employment tax?

That depends on, you guessed it, your business entity. The entities that have to pay self-employment tax are:

• Sole proprietorship

• Partnership/ Multi-member LLC (limited liability company) (individual owners each pay self-employment tax)

• Single-member LLC

If you don't see your business entity on this list—rejoice! You don't pay self-employment tax. If you're on this list and have more than $400 in annual net income, keep reading.

Self-employment tax is basically your Social Security and Medicare taxes.

Unlike folks who are W-2 employees and whose employers pay for half of their Social Security and Medicare, you're responsible for the whole shebang, which is typically 15.3% of your profits. (This could vary a little depending on your income.)

Before you take a trip to bummer town, know that you generally only have to pay self-employment tax on 92.35% of your profits. Also, you can deduct 50% of your self-employment tax from your taxable income. (You will still pay self-employment tax on your total taxable profits, but your adjusted gross income, which determines your income tax rate, will be lower due to the 50% self-employment tax deduction.)

Here's an example of how to calculate your self-employment tax:

• $100,000 in annual profit

• $100,000 x 92.35% = $92,350 earnings subject to self-employment tax

• $92,350 x 15.3% = $14,130 self-employment tax

Remember, self-employment tax is in addition to your income tax.

Wait—what happens if my business doesn't have any profit?

If you're filing your taxes with net losses, which means your business expenses were higher than your earnings, you won't be liable for self-employment and income tax. You're taxed on the profits of your business, so if there's no profit, then your tax is zero.

But, just because you don't have business profit doesn't mean you can skip out on filing your taxes. You still have to report your revenue and tax deductions to show why your business didn't make any money.

What's the deal with estimated taxes?

This one is funky. Estimated taxes are not actually taxes, but rather quarterly payments that you make towards your final tax bill. The idea is that you're paying your taxes as you go, rather than all at once the end of the year.

You're required to pay estimated taxes if you will owe more than $1,000 in taxes at the end of the year and you are a:

• Sole proprietorship

• Single-member LLC

• S-corp (individual owners each pay estimated taxes)

• Partnership/Multi-member LLC (individual owners each pay estimated taxes)

If you're a C-corp, you need to pay estimated taxes if you'll owe more than $500. (Your business pays estimated taxes based on the corporate income tax and the individual owners pay estimated taxes on their dividends.)

If you don't pay your estimated taxes, there is a penalty. Individuals calculate it on Form 2210; C-corps use Form 2220 instead.

Since you won't know your final tax bill until you file your tax return, your estimated taxes are just that: estimates of how much you will owe. When you file your tax return and receive your tax bill, your estimated tax payments will be applied to that bill.

For example, let's say you pay $10,000 in estimated taxes throughout the year. When you file your tax return, you find that you owe $12,000 in taxes. Since you've already forked over $10,000, you only need to pay the remaining $2,000. If you overpaid, the IRS would send you a refund—unless you choose to have your overpayment applied to your next estimated tax payment.

Looking for more information on this topic? Read this article on paying and calculating your estimated tax payments.

What about payroll taxes?

If you hire employees, you'll also need to take care of payroll taxes.

There are two types of employer payroll taxes:

• FICA tax (Federal Insurance Contributions Act)

• FUTA tax (Federal Unemployment Tax Act)

FICA payroll tax is made up of Social Security and Medicare taxes. As an employer, you'll pay 7.65% of your employee's gross wages in FICA tax—6.2% for Social Security (up to the annual wage base limit) and 1.45% for Medicare (with no wage cap).

FUTA taxes help fund federal unemployment payments for people who have lost their jobs.

While the FUTA tax is 6% of an employee's first $7,000 in wages each year, you can receive a 5.4% credit if you pay your state unemployment taxes on time. This credit effectively brings your FUTA tax rate down to 0.6% of the employee's first $7,000 in wages. Anything after $7,000 is not subject to FUTA taxes.

You'll need to pay these employer payroll taxes in addition to your employees' wages every time you run payroll. Keep in mind that 1099 contractors are not employees, so you don't have to pay payroll taxes for them.

What taxes do I need to pay in my state?

Okay, now that we've covered the federal taxes, let's turn to the states.

State taxes vary depending on the state. Most states have income tax, except for these nine:

• Alaska

• Florida

• Nevada

• New Hampshire

• South Dakota

• Tennessee

• Texas

• Washington

• Wyoming

The remaining 41 states (plus the District of Columbia) either have a flat income tax rate, which means the income tax rate is the same for everyone, or a progressive tax rate, which means the rate changes based on your income.

Depending on where you live, you also may need to pay city and local income tax and even local business taxes. Check with your local business tax agency to see if your city has local business taxes.

Most states that have income tax also require that you make estimated tax payments if your income tax is over a certain threshold. Since state tax regulations vary, it's best to talk with your accountant about your specific situation.

Should I worry about sales taxes?

Sales tax is also a state-specific tax, and just like federal payroll taxes, you may need to pay sales tax regardless of your business entity.

However, unlike federal payroll taxes, sales tax is a pass-through tax. For every taxable item you sell, you collect sales tax from your customers and then pay your state's tax agency the amount you collected.

If you're staying on top of your sales tax and collecting from customers correctly, your business won't lose money paying sales tax. In other words, sales tax is more like a task you have to take care of than a tax you're paying out of your business profits.

So what items are taxable? That depends on your state!

Every state (except Alaska, Delaware, Montana, New Hampshire, and Oregon, which have no statewide sales tax) sets its own sales tax regulations, which determine the rate and which items are taxable. States also have their own requirements on which sellers need to collect sales tax and whether a permit is required.

You can look up your state's sale tax regulations here or use Gusto’s Sales Tax Calculator.

Whew! That was a lot of information about small business taxes. So, we made you a chart of business entities and what types of small business taxes they likely need to pay to give your poor brain a rest.

Remember, your specific situation may differ, so be sure to speak with your accountant.

While small business taxes will never be your favorite thing, the more you know and understand about them, the less scary they become.

FAQs

What types of taxes does a small business have to pay?

Depending on business entity type, a small business may owe income tax, self-employment tax, estimated taxes, payroll taxes (if it has employees), excise tax, and state/local taxes like sales tax. Not every business owes every tax—it depends on the entity structure.

Does a business with no profit still have to file taxes?

Yes. Even if a business has no profit—or a net loss—it still must file a tax return showing why it earned no profit. It just won't owe self-employment or income tax on profits it didn't make.

What's the difference between self-employment tax and income tax?

Self-employment tax covers Social Security and Medicare contributions (about 15.3% of 92.35% of profits) and applies to sole proprietors, single-member LLCs, and individual owners in partnerships or multi-member LLCs. Income tax is separate and is owed in addition to self-employment tax.

Do I need to pay estimated quarterly taxes?

If you're a sole proprietor, single-member LLC, S-corp, or partnership/multi-member LLC owner who expects to owe more than $1,000 in taxes for the year, yes. C-corps must pay estimated taxes if they expect to owe more than $500.

Which states have no state income tax?

Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income tax.