According to a May 2019 report issued by the National Federation of Independent Business, approximately three-quarters of businesses don’t pay a business rate when it comes to state and federal taxes. That is because they don’t have enough employees or income to qualify as a corporation. Because of this, the Internal Revenue Service (IRS) considers these businesses pass-through entities.
The term pass-through means that the business pays taxes based on the total income and deductions of the owner. If your state collects income tax, the Tax Cuts and Jobs Act of December 2017 changes what you pay based on the business tax situation of your state. This term refers to how favorable the business climate is in your state compared to others.
Types of Federal and State Taxes You May Need to Pay as a Small Business Owner
As a small business owner, you may need to pay some or all of these six types of taxes:
Federal Income Tax
You pay this obligation based on your personal tax return if you work as a sole proprietor or have organized your business as a partnership, limited liability company, or S corporation. Only small businesses organized as a C corporation pay the corporate income tax rate. As of the tax year 2018, all S corporations pay a flat rate of 21 percent. This was a considerable change from the variable rates of 15 to 39 percent effective in earlier years. Business owners paying taxes as a pass-through entity pay progressively, meaning they pay more taxes the more income the company earns.
State Tax
If you conduct business in one of the 41 states that collect state income tax, that is the state that receives your payment regardless of where you live. Although state taxes can vary significantly, they are typically less than federal taxes.
Sales Tax
Small businesses, especially those in the retail sector, need to collect sales tax from customers and remit it to their county, state, or municipality. Percentages vary widely by state.
Payroll Tax
Businesses pay 7.65 percent social security tax per employee while employees pay the identical portion. The amount breaks down to 6.2 percent of wages up to $132,900 in 2019 and an additional 1.45 percent for Medicare.
Self-Employment Tax
This tax applies only to partners and sole proprietors. The IRS imposes a 15.3 percent tax on self -employed individuals. It taxes the first 12.4 percent of earnings up to $132,900 to fund the social security program and an additional 2.9 percent tax on all net earnings.
Excise Tax
Small businesses in the indoor tanning salon, firearms, alcohol, tobacco, firearms, and gasoline businesses, along with several others, pay an excise tax based on their industry, product sold, and method of production.
Confused? We’re Just a Phone Call Away
At Capital Business Strategies, we know this is a lot of information for any small business owner to track. We invite you to schedule a consultation to learn more about how we can assist you with meeting your tax obligations while maximizing business income at the same time.