When running a business, there are many things to consider – from the products and services you offer to the marketing strategies you’ll use to attract customers. Expenses will be one of your top concerns, and you must keep a close eye on where every dollar is going. To ensure your business is successful, you’ll need to be mindful of all aspects of expenses, including the ones that come up unexpectedly.
One of the most necessary expenses to keep track of is your business taxes. Taxes can be complex and vary depending on your business type, location, and other factors. Not filing them correctly may result in significant penalties and interest, so staying on top is crucial. You’ll need to pay taxes on your business income, whether a sole proprietor or a large corporation.
This blog post will provide an overview of business taxes in the United States and explain the main facts you need to know. We’ll also discuss the benefits of tax planning and taking advantage of expert advice regarding your taxes. Keep reading if you want to improve your business’ tax compliance and save money in the long run.
What Are Business Taxes?
Business taxes are any taxes businesses and corporations must pay on their income. These taxes fund various government programs, including infrastructure, education, and defense. Businesses also use taxes to comply with regulations, such as environmental ones. As mentioned, tax compliance is often a high cost for businesses.
The most common business taxes are local income, employment, and sales taxes, although there are other types. We’ll delve deeper into the different types of business taxes later. For now, it’s important to note that business taxes are generally separate from the personal income taxes that individuals must pay on their earnings.
How Business Taxes Work In 2022
The Tax Cuts and Jobs Act, effective January 2019, made several changes to business taxes in the United States. Most notably, it lowered the corporate tax rate from 35% to 21%, meaning businesses will now owe less in taxes overall. The law also created a deduction for pass-through entities or businesses whose income is taxed at the individual rate and eliminated many itemized deductions.
The tax season in 2022 began on January 24 for most filers. The deadline to file your taxes was April 18, although you could get an extension if you needed more time. You’ll likely need Form 941 for your quarterly payroll taxes if your business has employees. Other business tax forms include Form 720 for excise taxes, and state forms, depending on your location.
Estimated tax payments are due:
- April 18 for the first quarter
- June 15 for the second quarter
- September 15 for the third quarter
- January 17, 2023, for the fourth quarter
The Importance Of Business Taxes
Funding
As mentioned, business taxes go toward government programs and services benefiting businesses and society. For example, taxes help pay for roads, bridges, schools, and more.
Balance
Business taxes help level the playing field between businesses of different sizes. Larger enterprises typically have more resources and can take advantage of tax breaks and loopholes that smaller firms can’t. By requiring all businesses to pay their fair share of taxes, everyone can compete on an equal footing.
Compliance
Finally, taxes contribute to overall compliance with other laws and regulations. If a business doesn’t pay its employment taxes, it may be subject to heavy fines or criminal charges. Businesses that file their taxes correctly and on time can avoid these penalties and help ensure a level playing field for all.
Types Of Business Taxes
There are several types of business taxes, and the specific ones your business is responsible for will depend on various factors. Some of them are:
Local Income Taxes
Also known as city or county taxes, municipalities charge these to businesses based on their profits. Not all cities and counties have local income taxes, but those that do often have different rates. For example, the rate in San Francisco is much higher than in neighboring Oakland.
Employment Taxes
Employment taxes include Social Security and Medicare Taxes (FICA), unemployment insurance tax (FUTA), and federal withholding tax. Employers must withhold these taxes from their employees’ paychecks and pay a portion themselves. The amount withheld from each paycheck depends on the employee’s income.
Self-Employment Taxes
Sole proprietors, partners in a partnership, and LLC members who don’t categorize as employees pay self-employment taxes. The tax rate for self-employment tax is 15.3 percent, which includes 12.4 percent for Social Security and Medicare taxes and the rest for FUTA and federal withholding taxes.
Sales Taxes
Sales taxes are levied on goods and services, and state and local governments are responsible for charging them. The specific items subject to sales tax vary by jurisdiction, but they typically include retail items, food, lodging, vehicles, admissions to entertainment venues, etc. Businesses must collect sales taxes from their customers at the time of purchase and then remit them to the appropriate government agency.
Use Taxes
Use taxes are similar to sales taxes but imposed on purchasing goods and services that businesses will use, consume, or store in the jurisdiction that levies the tax. For example, if you buy office supplies online from a retailer in another state, you may be responsible for paying the use tax on those items.
Property Taxes
The value of a business’s property, including land, buildings, and equipment is subject to property taxes. The tax rate varies but is typically around two percent of the property’s assessed value. Businesses that don’t own their property may still have to pay taxes on leased property, such as office space or retail storefronts.
Environmental Taxes
Environmental taxes have become increasingly common as businesses are held responsible for their impact on the environment. These taxes can be carbon taxes, emissions trading schemes, or pollution charges. They aim to encourage businesses to reduce their environmental impact.
Does My Business Need To Pay Taxes?
In general, all businesses that earn income must pay taxes. However, there are some exceptions. For example, certain business entities, such as sole proprietorships and partnerships, may not be required to pay corporate income tax. Additionally, nonprofit organizations are generally exempt from paying federal income tax.
It’s also worth noting that businesses only have to pay taxes on their net income, or the total revenue they earn minus any expenses they incurred in generating that revenue. Therefore, businesses can deduct various fees when calculating their taxable income, including advertising costs, employee salaries, and rent.
Calculating Business Taxes
Depending on the tax type and your business location, you can calculate business taxes using different methods. In general, businesses will calculate their taxes using: marginal tax rates, average tax rates, or effective tax rates.
Marginal tax rates apply to businesses that have income above a certain threshold. The specific rate varies by jurisdiction but is typically around 30 percent. A business with a taxable income of $100,000 will owe $30,000 in taxes. On the other hand, you can calculate average tax rates by taking the total amount of taxes owed and dividing it by the business’s total income.
An effective tax rate is the total amount of taxes owed divided by the business’s taxable income. They’re different from average rates because they only consider the portion of a business’s income subject to taxation. If a business has $100,000 of taxable income and owes $30,000 in taxes, its effective tax rate would be 30%. However, if it had $200,000 of total income but only $100,000 of taxable income (due to deductions), its effective tax rate would be 15%.
Strategies For Managing Your Business Taxes
Some common strategies you can use to manage your business taxes are:
- Being aware of all the different types of taxes that apply to your business and planning accordingly.
- Keeping good records of all your income and expenses so you can make deductions when calculating your taxable income.
- Working with a tax advisor or accountant to help you plan and file your taxes.
- Taking advantage of tax breaks and incentives available to businesses in your jurisdiction.
- Filing your tax returns on time and paying any taxes owed promptly.
Doing Taxes On Your Own Vs. With The Help Of An Expert
There are pros and cons to doing your taxes on your own or with the help of an expert. Doing your taxes on your own can save you money, but it can also be time-consuming and stressful. While working with an expert can cost you more in the short term, it can save you time and hassle in the long run. They can also guarantee that you take advantage of all the deductions and tax breaks you’re entitled to.
When you work with a tax advisor or accountant, they will have different responsibilities in your business, including:
- Calculating your business taxes owed.
- Filing your business tax returns.
- Paying any business taxes owed.
- Advising you on strategies to minimize your tax liability.
Nesso Tax – Avoid Paying Unnecessary Penalties With Professional Tax Services
At Nesso Tax, we understand how important it is to get your taxes done right. We’re a team of tax experts in Connecticut who can help you with all aspects of your business taxes. We can assist you in calculating your taxes owed, filing your returns, paying your taxes, and advising you on strategies to minimize your tax liability.
As part of the Nesso Group, we guide individuals and businesses across multi-dimensional areas of expertise. Our services include tax, accounting, wealth, insurance, and more. We aim to provide our clients with the most comprehensive and holistic advice possible to alleviate stress and elevate success.
