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, it doesn’t have to be confusing.
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Federal small business taxes come in all kinds of shapes and sizes, and depending on your business type, 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.
What is a business tax?
A business tax can be one of many kinds of taxes. The IRS divides business taxes into five categories:
Not all small businesses 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 does a small business 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 IRS requires that all employment tax—this includes federal income tax and your employer contribution to Medicare and Social Security—be paid via the IRS’s Electronic Federal Tax Payment System (EFTPS).
The rules are a bit different for quarterly estimated taxes. To pay estimated taxes, the IRS requires small business owners to complete Form 941 and mail a voucher alongside a check or money order made payable to the United States Treasury. If you remain unsure of how to file your tax and when to file it, don’t be afraid to ask your accountant.
What taxes does a small business have to file?
The IRS employment tax due dates page indicates that small businesses must pay several taxes, including:
- Federal unemployment taxes
- Social Security and Medicare taxes
- Annual federal taxes
- Quarterly federal taxes (also known as estimated quarterly taxes)
The first two of these taxes fall under the employment taxes category mentioned earlier, and the final two of these taxes are income taxes. Quarterly taxes also fall under the aforementioned estimated taxes. All small businesses pay these federal taxes—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 does a business have 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 profits—you just won’t pay any business taxes if you have no profit. But only corporations that expect to owe at least $500 in annual taxes should pay quarterly estimated taxes.
The rules are a bit different if you’re a sole proprietor or single-member LLC. Any sole proprietor or single-member LLC whose net profit is at least $400 during a given year must pay self-employment taxes, income taxes, and estimated taxes. Self-employment taxes also apply to a business owner with a stake in a partnership, multi-member LLC, or S corporation.
Alright, how does federal income tax work 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:
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.)
|Entity ||Individual is taxed||Business is taxed||Form|
|x||1040, U.S. Individual Tax Return with a Schedule C|
|x||1040, U.S. Individual Tax Return with a Schedule C|
|x||1065, U.S. Return of Partnership Income (entity only) |
1040, U.S. Individual Tax Return with a Schedule E (owners only)
|S-corp||x||1120S, U.S. S-Corporation |
Income Tax Return with a 1120S Schedule K-1 for each owner (entity only)
1040, U.S. Individual
Tax Return with a Schedule E (owners only)
|C-corp||x||x||1120, U.S. Corporation Income Tax Return and 1099-DIV for each owner (entity only) |
1040, U.S. Individual Tax Return and possibly a Schedule B (owners only)
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 (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 (calculated on Form 2210).
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.
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 seven:
- South Dakota
Two states, New Hampshire and Tennessee, don’t have state income tax but do tax interest and dividends.
The rest of the 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 has its own sales tax regulations, which determine the sales tax rate and taxable items. States also have their own requirements on what sellers need to collect sales tax and whether a permit is required.
You can look up your state’s sale tax regulations here.
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.
|Entity||Income Tax||Self- employment Tax||Estimated Taxes||Payroll Taxes (if you have employees)||Sales Tax (applicability based on state regulations)|
|Partnership / Multi-member LLC (entity)||x||x|
|Partnership /Multi-member LLC (individual owners)||x||x||x|
|S-corp (individual owners)||x||x|
|C-corp (individual owners)||x||x|
While small business taxes will never be your favorite thing, the more you know and understand about them, the less scary they become.