There are also different types of taxes, depending on various business activities, like selling taxable products or services, using equipment, owning business property, having employees, and of course, making a profit. If you are just starting your business, you need to know what taxes you’ll be expected to pay. If your business has changed—for example, if you have bought property or started hiring employees—you’ll need to know about the taxes on these activities, too.
Income Taxes for Small Businesses
All businesses must pay tax on their income; that is, the business must pay tax on the profit of the company. How that tax is paid depends on the form of the business. Most small businesses are pass-through entities, which means that the gains or losses are passed through to the owners on their personal income tax returns.
Income Taxes for Sole Proprietors and Single-Member LLCs
Sole proprietors and owners of single-member limited liability companies (LLCs) pay income tax based on the net income of their business. To determine the net income, you’ll need to complete Schedule C as part of your personal tax return. The net income from Schedule C is added to your other sources of income to determine your total tax.
Income Taxes for Partners and Multiple-Member LLC Owners
Partners in partnerships and multiple-member LLC owners file a partnership business tax return for information purposes only. The individual partners or LLC members pay income taxes for their share of the income of the business. They receive a Schedule K-1 showing their income from the business, adding this schedule to their personal tax returns. Owners of LLCs are taxed as either sole proprietors (one owner) or partnerships (multiple owners). Some LLCs can elect to be taxed as a corporation (see below).
Income Taxes for S Corporations
S corporations are similar to partnerships. Owners of S corporations divide up the income of the business, and each owner receives a Schedule K-1 to include in their income tax return.
Income Taxes for Corporations
Corporations pay income taxes as separate entities from their owners. The corporation files a tax return on IRS Form 1120 for the year. The net income from the corporation isn’t taxed unless it’s distributed by the company to the shareholders, usually in the form of dividends.
Self-Employment Tax on Each Owner’s Share of Business Income
Self-employment taxes are those paid by sole proprietors, partners in a partnership, and LLC owners. This tax is for Social Security and Medicare, and it’s based on the net income of the business. You must calculate self-employment taxes using Schedule SE and add the total of this tax due to your personal tax return. If your business doesn’t have net income for a year it means no self-employment tax is due. It also means you don’t get Social Security or Medicare credits for that year.
Estimated Taxes for Business Owners
Because you are the owner of a business, no one withholds income tax and self-employment tax from the money you take out of the business. (You don’t get a paycheck, remember, because you aren’t an employee.) The IRS requires that these taxes be paid throughout the year, so you must pay estimated taxes quarterly. The first payment of the year is due April 15, then again on June 15, Sept. 15, and Jan. 15 of the following year. The estimated tax form for business owners combines business and personal income and taxes, including self-employment taxes.
Sales Tax on Products and Services Sold in Certain States
Businesses don’t directly pay sales tax on products and services they sell. But if your business operates in a state that has state income tax, you must set up a system to collect sales tax from your customers and report and pay that tax to your state. Merchants in most states are required to collect sales tax and pay it to the state’s department of revenue. Specific products and services are sales-tax eligible, depending on state laws. Money must be collected from customers, reported, and paid on a regular basis. Don’t forget sales taxes for items you sell online. A 2018 U.S. Supreme Court decision allowed states more freedom to collect sales taxes from online sellers located in their state. That means you may need to charge your out-of-state online customers sales tax and pay it on a regular basis.
Property Tax on Business Property
Property tax is a local tax. If your business owns real property, like a building, it must pay property tax to the local taxing authority, which is usually the city or county where the property is located. The tax is based on assessed value, the same as for personal assets, like a house. There are special considerations for paying federal taxes when you sell a piece of business property. You may have to pay capital gains taxes on the difference between your initial cost and the selling price.
Excise Taxes on Use and Consumption
Excise taxes are paid by a business for certain types of use or consumption, like fuels, or other activities, like transportation and communication. Excise taxes are paid to the IRS, either quarterly or annually, depending upon usage, using Form 720. In addition to the federal government, all U.S. states and many local governments levy excise taxes on various products and services, including gasoline, tobacco, and gambling activities.
Employment Taxes Paid on Employee Earnings
Businesses must withhold federal income taxes and FICA taxes from employees, and contribute an equal amount to FICA taxes. You will need to report the amounts owed and paid for these taxes each quarter, and make regular payments, depending on the size of your business payroll. This includes:
Federal income tax withholding from employee pay FICA taxes for Social Security and Medicare, paid by both employees and employers Federal unemployment (FUTA) taxes, paid by employers
Unemployment taxes are separate; they are paid entirely by employers, not employees. The amount you must pay as an employer is calculated based on a portion of the income of your employees.
Gross Receipts Tax and State Income Tax on Businesses
Most states have a state income tax for businesses; only a few states have no income tax. Most states use a graduated-rate tax, but a few have a flat tax. Some states impose a gross receipts tax on businesses instead of, or in addition to, a state income tax.
Dividend Tax on Corporate Shareholders
If you are an owner of a corporation, you are a shareholder. That means you pay income taxes on any income you receive from dividends. Each corporation decides when to pay dividends and how big the dividend will be. Dividends are not considered earned income, and you must pay a special dividend tax rate on dividends you receive, through your personal tax return. You will receive a 1099-DIV form with the amount of the dividend paid that year. You must include that information on the appropriate form, depending on the type of dividend and how long the dividend was held. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
