A Guide to Understanding Your Small Business Taxes

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Types of Small Business Taxes

Income Tax: All businesses, except for partnerships, are required to file an annual income tax return. Partnerships file an annual information return. The type of tax form you file varies based on your business structure (sole proprietorship, partnership, corporation, or S-corporation).

Self-Employment Tax: If you are a sole proprietor, an independent contractor, or member of a partnership (including LLCs taxed as partnerships) and you earn a profit, you will have to pay self-employment taxes. Self-employment taxes cover Social Security and Medicare taxes, which are typically withheld from an employee's paycheck.

Payroll Taxes: If you have employees, you'll need to withhold and pay payroll taxes. These taxes include federal income tax, Social Security and Medicare taxes, and Federal Unemployment Tax Act (FUTA) tax.

Sales Tax: If you sell physical products or certain services, you may be required to collect and remit sales tax. Sales tax rates are determined by your state and local governments.

Excise Taxes: If your small business involves selling gasoline, tobacco, or other specific products or services, you may be subject to excise taxes. These are taxes levied on specific goods and activities.

Choosing Your Business Structure

The type of business structure you choose determines how your small business will be taxed. Here are the most common business structures and their tax implications:

Sole Proprietorship: As a sole proprietor, you and your business are considered the same entity. Profits are reported on your personal income tax return using Schedule C, and you are responsible for paying self-employment taxes.

Partnership: A partnership is a business with multiple owners who share in the profits and losses. The partnership files an annual information return (Form 1065) to report the income, deductions, gains, and losses. The individual partners report their share of profits and losses on their personal tax returns and pay self-employment tax.

Corporation: A corporation is a separate legal entity from its owners (shareholders). Corporations pay tax on profits and file a Form 1120, the U.S. Corporation Income Tax Return. Owners of a corporation who work as employees must also pay personal income tax on their wages.

S-Corporation: An S-corporation is a type of corporation that offers pass-through taxation, similar to a partnership. Profits and losses are reported on the individual shareholders' tax returns. S-corporations file a Form 1120S, the U.S. Income Tax Return for an S-Corporation.

Limited Liability Company (LLC): An LLC offers liability protection to its owners (called members) but can choose how to be taxed. An LLC can be taxed as a sole proprietorship, partnership, or corporation.

Important Tax Deadlines

Keep track of important tax deadlines to avoid penalties and interest charges. Here are some key dates for small business owners:

- January 31: File and furnish Forms W-2 and 1099 to employees and independent contractors.
- April 15: Individual income tax return due date, including self-employed individuals filing Schedule C.
- March 15: Deadline for partnerships and S-corporations to file Form 1065 and Form 1120S, respectively.
- April 15: Deadline for corporations to file Form 1120.
- Quarterly Estimated Tax Payments: If you expect to owe income tax of $1,000 or more, you need to make estimated tax payments. Deadlines for estimated tax payments are April 15, June 15, September 15, and January 15 of the following year.

Note that deadlines may vary if they fall on a weekend or holiday.

Tax Deductions and Credits

Understanding available tax deductions and credits can help reduce your small business's overall tax liability.

Deductions: These expenses can be deducted from your taxable income, reducing the amount of taxes owed.

Office expenses: Rent, utilities, and office supplies.
Travel and vehicle expenses: Vehicle expenses for business use or mileage, parking fees, tolls, and lodging.
Advertising and marketing: Marketing and advertising costs incurred in promoting your business.
Insurance: Insurance premiums for liability coverage, property insurance, and other business-related policies.
Salaries and wages: Employee wages, bonuses, and benefits, including retirement plans.
Home office: A portion of your residence used exclusively for business activities (subject to certain limitations).
Depreciation: The decline in the value of business property, like buildings, vehicles, and equipment.
Interest: Interest paid on business loans and lines of credit.

Credits: Credits reduce your tax liability on a dollar-for-dollar basis, meaning a tax credit of $1,000 would lower your tax bill by $1,000.

Research and development credit: Offers a credit for qualified research expenses.
Work Opportunity Tax Credit (WOTC): Allows a credit for employers who hire individuals from certain targeted groups.
Small Business Healthcare Tax Credit: Offers a credit to eligible small employers who provide health insurance coverage to employees.

}"A Guide to Understanding Your Small Business Taxes" (part 1/2)