The Primary Types of Business Taxes

As a business owner, you know first-hand that running and growing your company is a daily challenge. The same thing can be said about your tax situation.

This article gives a brief overview of the primary types of business taxes you’ll likely encounter as a business owner: Income taxes, self-employment taxes, payroll taxes, and excise & sales taxes.

Why Understanding Business Taxes is Important

All businesses need cash to survive. If you fall behind paying your business’s taxes, you’ll need to divert a lot of this cash to get current on your tax obligation. And much of this cash was supposed to be used to sustain the business’s day-to-day operations.

This is why understanding business taxes and how to calculate them is so important - failing to pay business taxes can potentially cause your company to go out of business!

With that said, let’s take a look at the primary types of business taxes.

Business Tax #1: Income Taxes

Definition: Taxes paid on your business’s profit after all business expenses are paid and qualifying individual income tax deductions are applied.

Filing your income taxes: Sole proprietors, shareholders of S corporations, partners of a partnership, and members of limited liability companies report their business’s taxable income on their individual tax return (Form 1040). Shareholders of C corporations only pay income taxes on wages or dividends they receive, not their business’s entire taxable income.

In addition to federal income taxes, don’t forget about state and local income taxes if applicable.

Tax rate: Federal income tax rates can be as high as 37%. Higher incomes may also be subject to a 0.9% surtax.

Tax planning tip: To minimize income taxes, you’ll want to reduce your business’s net profit. To lower your business’s taxable income, consider purchasing a major piece of equipment or asking a customer to postpone an end-of-the-year payment to the following year. Certain individual deductions can also reduce your business’s net profit, such as qualified contributions to a retirement account, the standard deduction, or itemized deductions.

Business Tax #2: Self-Employment Taxes

Definition: Taxes paid on your business’s profit after all business expenses are paid is  self-employment tax. Government revenue generated from self-employment taxes goes to fund Social Security and Medicare. Unlike income taxes, you can’t use the standard or itemized deductions to reduce your taxable income subject to self-employment taxes.

Filing your self-employment taxes: Fill out Form SE and attach it to your individual tax return (Form 1040).

Tax rate: 12.4% for Social Security taxes is due on your first $160,200 of taxable income, and 2.9% for Medicare taxes on all your taxable income, for a total of 15.3%.

Tax planning tip: Consider becoming an S corporation. As an S corp shareholder, you’ll only pay self-employment taxes on the wages you pay yourself from the business. The remaining profits from the S corporation are not subject to self-employment taxes.

Business Tax #3: Capital Gains Taxes

Definition: When you sell an asset for more than what you originally paid for that asset, you have to pay capital gains taxes.

Filing your capital gains taxes: When you sell a business asset such as a vehicle, equipment, or a building, you must report this transaction on Form 4797 and attach it to your Form 1040.

Tax rate: If you owned the recently sold business asset for more than 12 months, the maximum tax rate you’ll pay is 20%. If you owned the asset for less than 12 months, the tax rate can be as high as 37%.

Tax planning tip: Consider having the party who bought your asset pay in installments. Instead of receiving one large lump sum of money all at once, spreading payments across several years can also help spread out the taxes you owe over the same number of years.

Business Tax #4: Payroll Taxes

Definition: Payroll taxes are taxes paid on the wages and salaries of employees. Similar to self-employment taxes, payroll taxes are used to fund Social Security and Medicare. A state’s unemployment tax, which covers that state’s unemployment compensation fund, is also considered a payroll tax and is paid by the employer. However, several states require some contribution from employees. The federal unemployment tax is paid only by the employer.

Filing your payroll taxes: Here’s a quick look at the various forms used to file payroll taxes:

• Form 940 - Federal unemployment tax return, filed annually (there’s also a corresponding state unemployment tax return)
• Form 941 - Tax return to report income, Social Security, and Medicare taxes withheld from employees’ paychecks and filed quarterly.
• Form W-2 - The information report provided to employees that shows total wages earned for a particular year
• Form W-3 - Information report filed with the Social Security Administration summarizes all W-2s issued by an employer. Copies of all W-2s are also included with the W-3.

Tax rate: Similar to the self-employment tax, 12.4% of employees’ wages are taxed to fund Social Security, while 2.9% of wages are taxed to fund Medicare, for a total tax rate of 15.3%. The employer pays half of these taxes (7.65%), while the employee pays the other half (7.65%).

Tax planning tip: Many employers take the 7.65% payroll taxes they are responsible for paying and bake it into an employee’s overall compensation package. So, while technically responsible for paying its 7.65% of payroll taxes, the employer passed this cost to the employee.

Business Tax #5: Excise & Sales Taxes

Definition: Sales taxes are normally collected as a percentage of the overall selling price of goods or services, such as an 8% sales tax on all clothing, while excise taxes are imposed on very specific goods and services, such as a $2 excise tax on a 20-pack of cigarettes.

Filing your excise and sales taxes: Federal excise taxes are filed quarterly using Form 720. State filing requirements for sales taxes can vary depending on the amount of tax you owe. Businesses that collect a high amount of sales tax must usually file a return once a month; a business that collects a small amount of sales tax may only need to file an annual return.

Tax rate: Check with your state or local tax authority to determine your sales tax rate. Federal excise rates also vary depending on the product being taxed.

Tax planning tip: While businesses are responsible for paying sales and excise taxes, many pass this cost to their customers.

Partner With a Tax Expert to Ensure Business Success

As you can see, you need to understand many types of business taxes if you want to comply with all of your tax obligations.

The good news is that while many of these taxes can be extremely complicated, help is only a phone call or email away.

Partner with a 1-800Accountant small business tax expert to stay compliant while minimizing the total amount of taxes you owe.