What are business taxes?
Business tax is the money a business must pay annually to the government including local, state, and federal taxes to help support public spending. Paying taxes is a normal part of business operations and is a task that every business must do to remain in business. Every type of business, especially the ones that make a profit required to pay taxes and adhere to regulations set forth by the government. Since there are different types and sizes of businesses, different rules apply when it comes to paying taxes.
What are a few types of taxes businesses pay?
Business owners and large corporations have different types of taxes to pay each year compared to the taxes that individual filers have to pay. Some of the main categories of taxes that businesses might have to pay depending on the type of business can include:
- Employment taxes: Employment taxes are taxes that a business pays if they have people working for them. The business reports the deposit t federal income tax that employees make to the government and pay a tax based on that number.
- Estimated taxes: These are taxes that a business must pay and are typically paid quarterly. Estimated tax payments cover a few different types of taxes. If your business doesn’t estimate them correctly and falls short, there could be a penalty fine.
- Excise taxes: This is a tax based on the consumption of certain products or services. Things like gasoline, alcohol, tobacco, and transportation are all examples of goods and services that have to be taxed when they are sold.
- Gross receipts tax: This is a state tax based on the business’ income regardless of if they were profitable. This can be hard for businesses that didn’t do well or are operating at a loss because they still need to pay this tax every year.
- Income taxes: Income taxes are taxes based on the business’ income. Many things go into a business’ income, which should be filed every year.
- Property taxes: These are taxes that a business pays depending on the type of property they operate the business in. The taxes can be calculated based on how much the building is worth as well as if the business leases or owns the property.
- Sales taxes: Sales taxes that are made off of merchandise needs to be paid back to the state. Sales taxes can depend on the individual state, along with the other states where business is done.
- Self-employment taxes: These taxes are for people who own their own businesses. This tax typically covers Social Security and Medicare for those with limited liability.
- State income taxes: State income taxes are taxes based on the business’s total revenue if they made a profit. This money goes to the state and is based on the company’s net income.
How to determine how much your business will pay?
The amount of money your business pays in taxes depends on the kind of business structure you have and if the rates change throughout the years. There are three main types of business structures, which include:
- C-Corps: These businesses are typically very large and are structured much differently than S-Corps and LLCs. They are mostly owned by people who buy shares of the company which means they are taxed as a separate entity. Therefore, shareholders aren’t taxed on the profits the company makes but are taxed on the shares they own and their dividends. The business is also taxed on the profits that are made, meaning C-Corps businesses are normally taxed twice.
- S-Corps: S-Corps businesses are similar to LLC-structured businesses, meaning that the business gets taxed only once. S-Corps businesses can be owned by up to 100 people, who are called shareholders. These shareholders must be citizens of the United States in order to own part of an S-Corps company. S-Corps businesses are only taxed on the income that the shareholders claim on their personal taxes. This means that the business itself is not taxed.
- LLCs: There are no shareholders within the LLC business structure, meaning its net profits are taxed. LLC businesses have members, which are people who are not typically held responsible for debts and liabilities.
After identifying what type of business structure, you have, you can determine how much your business will pay in taxes. The only exception is that C-Corp businesses that profit more than $1 billion can be subjected to a 21% corporate tax rate due to the Tax Cuts and Job Act of 2017. On top of that, individual states will set a corporate tax rate as well. However, with laws constantly changing it’s important to stay up to date on any changes that could impact your business, such as the new Inflation Reduction Act which became law last year.
To determine the tax rate for an LLC or an S-Corp business, use a calculator to come up with the yearly net income. This number is based on the income records your business has from the year. Figuring out how much of the net income went to employees, the business owner, insurance, and other benefits is next. Finally, use the tax brackets that the government publishes every year to determine how much your income will be taxed on.
These few steps can be helpful to determine a rough estimate of much your business will have to pay in taxes. Using tax prep software or filing online is the final step if you wish to file your taxes without the help of an accountant. Here is the tax bracket that was published for the year 2022:
|Rate||Individual Incomes||Joint Incomes|
|10%||Less than or equal to $10,275||Less than or equal to $20,550|
|12%||More than $10,275||More than $20,550|
|22%||More than $41,775||More than $83,550|
|24%||More than $89,075||More than $178,150|
|32%||More than $170,050||More than $340,100|
|35%||More than $215,950||More than $431,900|
|37%||More than $539,900||More than $647,850|
How to prepare for business tax season?
Business tax preparation doesn’t have to be a rushed process or something to only think about at the beginning of the calendar year. It can be beneficial for the business, and everyone involved if taxes are taken into consideration throughout the year. It’s important to keep everything organized in a file cabinet such as paperwork, bills, receipts, and expenses all labeled correctly. This can make it easier to collect and gather together when it comes time to file your business taxes. Here are some other things to keep in mind when preparing for tax season:
- Stay up to date with tax regulations: The regulations could change so you want to make sure you are aware of any changes and how they can affect your taxes.
- Extensions are an option: A business tax extension is when a business can request extra time to file their taxes. The business still needs to pay the taxes, but an extension would help solve some behind the scenes issues.
- Estimate your taxes before sending them off to an accountant: Taking the extra step and calculating an estimate before sending them to an accountant could be beneficial. It can prepare the business owner and help them get a feel for how much they will have to owe.
- Itemize your business expenses all year: By itemizing your bills and expenses all year, it can help with your business tax filing. It can make the job of your accountant easier and can make the turnaround quicker.
- Learn about deductions and credits: Understanding the tax deductions your business qualifies for may reduce the amount that you owe. Ask your accountant about the credits you may qualify for or look at the tax prep software you use if you file your own taxes.
When to file business taxes?
The annual due date for filing taxes for a C-Corp business is April 15th, and the due date for both S-Corps and LLCs is March 15th. If either of these dates happens to fall on a Saturday, Sunday, or federal holiday, the taxes will be due the following business day. Taxes are considered “on time” if the envelopes are addressed, stamped, and put in the mail by or before their respective due dates.
How much does a small business have to make in order to file taxes?
Small businesses must make a certain amount of money in order to file taxes. The magic number depends on a few different factors such as income, deductions, the kind of business and the expenses the business has. Depending on those factors, small businesses could pay between 10% and 37%.
What are some things to avoid when filing taxes for a business?
Just like how there are things to do, there are things not to do when filing taxes. Here are a few things to avoid when filing business taxes:
- Being disorganized: Not having your paperwork properly organized with information missing can set you back from getting your taxes done. Take the time to make sure you have all of your information ready to go prior to filing your business taxes.
- Mix personal and business expenses: Avoid combining your personal expenses and business expenses because it can become hard to keep everything straight. To make things easier, open a separate bank account for business-related expenses so that nothing gets mixed up.
- Passing up deductions: Not being aware or forgetting to take part in tax deductions can hurt your business. The more things you deduct, the more money goes back into the business. Making a list of possible deductions your business can take part in can help keep track of them so that when you file, you don’t forget any.
- Rushing to do your taxes: Planning well in advance, gathering the information, and organizing it can help to limit stress when it comes to taxes. Rushing to do it right before the deadline can increase the risk of making mistakes.
How to File Business Taxes
Understanding business taxes can take time, energy, and planning. There are so many things to do and to consider before, during, and after tax season. Filing business taxes can become stressful, so doing what you can beforehand may make it easier. It’s very important that business taxes are done right and are on time because of how strict the rules and regulations can be. Overall, knowing the essential information when it comes to business taxes can help during tax season.
Business News Daily. 8 Tax Season Preparation Steps. (https://www.businessnewsdaily.com/6689-tax-season-prep-steps.html) Accessed February 6, 2023.
Expert Market. A Guide To The Kinds Of Taxes Paid By Small Businesses In The USA. (https://www.expert-market.com/a-guide-to-the-kinds-of-taxes-paid-by-small-businesses-in-the-usa/) Accessed February 3, 2023.
IRS. When to File. (https://www.irs.gov/filing/individuals/when-to-file) Accessed February 6, 2023.
LendingTree. Small Business Tax Rates: What to Know. (https://www.lendingtree.com/business/small-business-tax-rate/) Accessed February 8, 2023.
Nav. C Corp vs. S Corp: What’s The Difference? (https://www.nav.com/blog/s-corp-vs-c-corp-whats-the-difference-423709/) Accessed February 8, 2023.
NorthOne. 7 Mistakes to Avoid When Filing Business Taxes. (https://www.northone.com/blog/taxes/filing-business-taxes) Accessed February 6, 2023.
Patriot. What is the Corporate Tax Rate? [Federal & State Guide]. (https://www.patriotsoftware.com/blog/accounting/corporate-tax-rate/) Accessed February 9, 2023.
Projection Hub. 4 Steps to Determine How Much Your Business Will Owe in Taxes? (https://blog.projectionhub.com/4-steps-to-determine-how-much-your-business-will-owe-in-taxes/) Accessed February 6, 2023.
The Balance. How Much Tax Does a Small Business Pay? (https://www.thebalancemoney.com/how-much-tax-do-small-businesses-pay-3974568) Accessed February 6, 2023.
The Hartford. Types of Business Taxes. (https://www.thehartford.com/business-insurance/strategy/understanding-business-taxes/types) Accessed February 3, 2023.
U.S. Bank. Understanding tax law changes. (https://www.usbank.com/investing/financial-perspectives/market-news/how-bidens-income-tax-policy-changes-could-affect-you.html) Accessed February 9, 2023.