Everything a Small Business Owner Needs To Know About Their Taxes

Running a small business can be great fun, and there are definitely advantages to being your own boss, but there are some elements of running a business that are daunting for even the most committed entrepreneur. Although it might be the least appealing aspect of running a business, ensuring that you are staying on top of your taxes can save you time and money in the long run.

Putting systems in place to keep track of your business expenditure will make completing your taxes quick and easy, so it’s worth doing as soon as you can. Keeping your records in a tax-friendly way, especially if your accounting software includes a tax kit, will enable you to complete the process quickly, without errors, and with minimal stress.

The most important things small business owners need to know about tax are:

Local tax rates can vary

The tax due for a small business can vary and include both federal and state taxes. The tax codes vary from state to state, so it’s important to understand how much is due in the area where your business trades. 

There are different ways of collecting taxes that can vary greatly between states. Some states do not impose a state-level sales tax, such as Alaska, Montana, and New Hampshire, and there are also those that don’t have individual or corporate income tax rates.

Some states are more small-business-friendly than others, so if you have a choice about where to base your business, you may wish to research the options to find one with favorable rates for your type of organization.

Tax rates depend on your business type

Depending on the nature of your business, the size of your operation, and the way you want to operate, there are a number of ways of structuring your business:

Sole proprietorship – if you run your small business alone and do not incorporate it, then you can include your business profits on your personal tax return. Businesses run in this way are considered as ‘pass through’ entities as far as taxation is concerned, meaning that the taxes pass through to the owners – the business and the individual are considered effectively the same.

Partnerships – if your business is owned by more than one person, then so long as it is not incorporated, the business can also be considered a pass-through entity. The owners can report their share of the business income on their own tax returns without having to file separately.

Limited liability corporations – for business owners that want to have the benefits of operating like a corporation, but with the taxation rates of a sole proprietorship, an LLC is a practical option. It offers the protection of operating a corporation in as much as there is no personal liability on the part of the owner(s), but with the favorable rates of a small business unless the owner opts for a more complex structure.

Corporation – a corporation operates as an independent entity, paying tax as an organization separate from the owners. There is a flat rate of tax for corporations and owners report their business’s taxes separately from their own.

Other types of tax

Depending on the nature and size of your business, you may be liable to pay certain other types of tax, which could include:

Payroll tax – Federal Insurance Contributions Act (FICA) taxes are paid by employers and employees. Federal Unemployment Taxes are also paid by employers, although there may be tax credits available to some businesses.

Self-employment tax – if you employ yourself within the business, you will be liable for payroll taxes on your earnings.

Capital gains tax – if you sell business assets and make a profit, then this will attract capital gains tax at variable rates depending on the circumstances of the sale.

Dividend Tax – shareholders in a business pay tax on their dividends via their personal tax return.

Excise tax – only certain types of businesses need to pay excise tax. 

Keeping accurate financial records will help you complete your taxes and give you a good understanding of your business’s overall financial wellbeing.