Everything You Need to Know About Business Taxes


As the owner of a service-based business, you’re responsible for paying many different types of taxes, ranging from income to payroll tax. It’s important to understand which local, state, and federal taxes you owe if you’re going to avoid legal complications and heavy fines. Here’s everything you need to know about business taxes.


Types of businesses taxes


Businesses can be taxed at the federal, state, and local level depending on their size, business structure, and number of employees. Here are the most common types of business taxes:


Income tax


Both individuals and businesses are taxed based on their annual income. Every state has its own business income tax and laws regarding the tax. You can look into your state’s specific regulations to determine what you owe.


Estimated tax


An estimated tax is a quarterly payment based on the income of a small business owner, freelancer, or self-employed individual who does not have their taxes automatically withheld from their earnings. These taxes must be paid on a quarterly basis or businesses will be subject to additional fees when they file their annual tax return. If a business overpays their estimated tax, they get the money returned from their annual tax return.


Payroll tax


Also known as an employee tax, a payroll tax is a percentage withheld by an employer paid to the government on their behalf. These taxes are used to fund Social Security and Medicare and include a federal income tax withholding and a federal unemployment tax.


Self-employment tax


Those who are considered sole proprietors, freelancers, and independent contractors who work as a business must pay a self-employment tax. Like the payroll tax, these taxes help fund Social Security and Medicare.


Property tax


Every business is taxed by the total value of property they own or a percentage of that value. The property tax that small businesses are required to pay is defined differently by each state. Some states collect property tax from a business’s commercial real estate and others collect the tax for vehicles, equipment, and assets.


Sales tax


Some states require businesses to register to collect sales tax. Exclusions from sales tax often include food, clothing, medication, and utilities, though it differs in each state.


Corporations vs. pass-through entities


Your business type will impact how you are taxed. Pass-through businesses such as sole proprietors, partnerships, LLCs, and S Corps are not subject to corporate income tax as their owners are taxed via their personal tax return under individual income tax.


C corporations are taxed as a separate entity, meaning the owner is taxed twice — once for their business profits and once on what they earn through the business. Many corporate shareholders are exempt from income tax and not all corporate income is taxed at an entity level.


Business tax checklist for new owners


As a new business owner, here are nine tax tasks or considerations to help you get started.


Choosing a business structure


When you register your business with the state, you have to choose a business structure which will determine things like l ownership, operation, tax liabilities, which type of tax form you must use to file your return, and more. Research each type to understand which one is best suited for your business.


The types of business structure are:

  • Sole proprietorship: owned and operated by one person; most popular business structure.

  • Partnerships: owned and operated by two or more individuals; can be general or limited.

  • C Corps: independent legal entities separate from their owners; strong protection from personal liability.

  • S Corps: profits and losses passed directly to the corp’s owners; helps avoid double taxation.

  • Limited Liability Company (LLC): flexible structure; separates business and personal liabilities.


Employer Identification Number (EIN)


Also known as a Federal Tax Identification Number, the EIN is a unique identification number given to business entities to be identified by the IRS. You'll use this number when you file your tax returns as well as to pay your employees and apply for an account with certain financial institutions. Applying to get an EIN is free and available on the IRS website.


Selecting your tax year


While personal tax returns are paid based on the calendar year, as a business you have the option of choosing to operate on a fiscal year or the calendar year. To determine which is more beneficial for your company, talk to a financial advisor for their insight. If at any time you'd like to change your mind, you can request removal from the IRS using Form 1128.


Record all business expenses


When you file your business tax return, you need to accurately track all of your expenses. Be sure to separate your business and personal expenses by having separate bank accounts or using accounting software. Also, keep all important documents like receipts, checks, and bills in case of an audit.


Pay your taxes


It may seem obvious, but make sure you're paying your business taxes on time according to your schedule. This includes your estimated quarterly taxes and any business tax within whichever tax year you have to term it. Failing to do so can lead to both financial burdens and legal complications.

Software to help you get organized


Whether you ultimately decide to handle your taxes on your own or you hire a professional to guide the way, you will need an organizational method to ensure you have all of the information you need when it’s time to file and pay taxes.


Quickbooks Self-Employed


If you’re a solopreneur who does not have any employees, QuickBooks Self-Employed has a smartphone app and web interface that makes it easy to sync all of your data together. You can separate and track business and personal expenses, mileage, and more while also giving you quarterly tax estimates, and helping you maximize schedule C deductions.


Evernote


If you have difficulty wrangling paper receipts, Evernote makes it easy. Plus, the software allows you to create a finance system that can eventually be handed off to a team member when you scale your business.


Google Drive


Most people are familiar with Google Drive,along with Gmail, and use it to run their business. Leveraging Google Drive to organize your taxes can be a game-changer. Create a top-level folder for taxes and secondary folders for each tax year. From there you can use Google Sheets to track expenses, Google Calendar to set reminders for important tax deadlines, and even scan receipts by opening Google Drive and taking a picture. If you’re looking for other ideas, Google for Small Businesses has plenty to get you started.


Asana


Asana is a comprehensive project management tool that can be used to make your entire business more productive, including your taxes. You can organize all of your tax-related tasks by list, timeline, or calendar view and set them up to reoccur as often as necessary so you don’t miss important deadlines. With more than 100 integrations, it’s easy to connect it with other systems you’re using such as Google, Harvest, Quickbooks, and more. It’s even a great place to digitize and store receipts if you set up a project for that purpose.


Getting help with your business taxes


There are many complexities when it comes to filing your business tax return as a new business. If you’re feeling unconfident about filing taxes by yourself, look into hiring a tax professional to clear up any confusion and get your taxes filed on time and correctly.


At MyDreamBridge, we understand the complexities that come with entrepreneurship, including the overwhelm of tax season. To aid small business owners in getting their startups off to a great start, we’ve designed a 6-Week Startup Package which includes helpful resources like coaching calls, training videos, and more to save you time, get your business off the ground, and allow you to focus on scaling.



For more information and resources for aspiring solopreneurs and small business owners, head on over to www.mydreambridge.com.


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