As a business owner, it’s important to have a clear understanding of what you will owe come tax season. If you’re not a tax expert or are unfamiliar with legislation that affects your taxes, this can make it incredibly difficult from year to year.
Not only does tax law affect your taxes, but the size, structure, and revenue of your company can also have a huge impact.
In other words, filing your business taxes can be a convoluted process for most small business owners. Because it’s so complicated, it’s often wise to use a CPA Firm with tax experience.
Even if you do hire a tax expert, it’s a good idea to have some general knowledge of tax liabilities, standard tax rates, and how the Tax Cuts and Jobs Act impacts you.
Below is an introduction to small business taxes.
You Have Different Tax L
First, small businesses pay different taxes. Some of the different types of taxes that you might pay as a small business owner include:
- Income taxes
- Employment taxes, including payroll, unemployment, and workers comp
- Excise taxes
- Self-employment taxes
- Property taxes
- Sales taxes
- Capital gains taxes
What’s Your Tax Rate?
Currently, the U.S. corporate tax rate is set at a flat rate of 21 percent. If you operate a C-corporation, you will pay this tax rate no matter what revenue level your company earns. This will not include paid dividends and other distributions which are taxed separately.
Other businesses that do not operate under a C-corporation status use a tax method called “pass-through” which essentially means that taxes are only paid once on all the revenue that passes through to the owner(s).
Entities that use the pass-through taxation include LLCs, partnerships, and sole proprietors. These pass-through entities do not get charged at the flat 21 percent tax rate.
Instead, you include the business taxes when filing your individual tax returns. Depending on the tax bracket that you fall in as a result of your business revenue, you are taxed accordingly.
In 2019, these rates are estimated to be between 10%-37%, with the average small business owner paying near a 20% tax rate.
One new addition to this coming year’s taxes is the business deduction rate for pass-through entities which allows you to deduct up to $20,000 from your business income, before calculating your tax rate.
There are limits to this, of course: you cannot earn more than $157,000 as a single-filer or more than $315,000 as a joint filer.
Additionally, if your business provides a professional service, like medical or legal, you may not qualify for 100 percent of the deduction.
Should You Pay Taxes Quarterly?
Many small business owners don’t know that the federal tax system operates on a quarterly basis and actually allows you to pay throughout the year. This tactic can be a great way to avoid facing a huge tax surprise once a year, and instead lets you submit estimated tax payments quarterly.
When you file your annual taxes, those quarterly payments are deducted from your liabilities. Small business owners that use this strategy can plan their payments quarterly instead of paying in one lump sum. If you want to make quarterly payments correctly, you will need to plan according to your estimated income and anticipated tax bracket.
States Have Their Own Taxes
Beyond federal taxation, each state operates their own tax system that may affect your small business. Most states levy a tax on business income, or other associated taxes; meaning, even if that state doesn’t charge individual income taxes, you may still be hit with franchise taxes, corporate income taxes, or gross receipts taxes.
Small business taxes may seem confusing and complicated at first, but if you have the correct, up-to-date information, and the help of a qualified small business tax accountant, you can rest easy when tax season rolls around.