We’re going to level with you here: no one likes paying taxes. Taxes are unavoidable for every American, and understanding them is a very important part of running a business. Having the right approach to your business taxes could be the difference between success and failure for a new or small business. Unless your business is a certified non-profit, you can’t get around paying taxes.
Your tax rate might change from year to year, depending on economic growth and other political factors, but the tips found here can help you make the most of your tax situation.
This post will cover the basics for understanding taxes, but every business owner should have a tax professional they can reach out to with complex questions and needs. Please reach out to the tax professionals at Heartland Tax Solutions if you’re in need of additional help.
Determine the right legal structure for your organization
Depending on where you’re at in the startup process, you might have already established your business as one of the following types:
A sole proprietorship is fairly straightforward, and it’s often the category freelancers use for their businesses. If you’re the only owner of an unincorporated business, then you’re automatically classified as a sole proprietorship, which is the most common business entity in the U.S. Taxes aren’t very complex for sole proprietorships since they’re tacked onto your personal return. However, since you’re the only business owner, you take on sole responsibility for all financial and legal obligations.
S corporations elect to pass on their corporate income, losses, deductions, and tax credits to their shareholders. As such, they don’t generally pay income taxes since taxes are addressed at the individual level. There are requirements for correct classification as an s corporation, including no more than 100 shareholders who are not nonresident aliens, are individuals (as opposed to other corporations), and the corporation is limited to only one kind of stock.
Most corporations you think of (the big Fortune 500 companies) are classified as C corporations. These are similar to S corporations with a few key differences, including a more complex structure that includes a board of governors, officers, directors, and employees in addition to shareholders. C corporations are also taxed at the company level vs. at the individual shareholder level, and the current tax rate for C corporations is a flat 21%. One benefit to establishing your business as a c corporation is that it often helps show legitimacy so you can catch the attention of investors and clients, which usually leads to more funds in a shorter period of time.
Small businesses commonly set themselves up as LLCs since there are tax advantages, including no cap on the number of shareholders, taxes are paid at the individual level, and you can deduct your business losses. You must register your LLC with the state in which you do business, and this requires paying a variable fee depending on your state. However, the tax advantages are often big enough to attract a new small business to this category.
The bottom line is that choosing the right classification for your small business is important for tax purposes, so do your research and ask for help when you need it.
Take advantage of tax deductions to lower your tax bill
The Internal Revenue Service (IRS) allows valid business expenses to be written off, which lowers how much your business will owe at tax time. These are things like business travel, equipment and materials, labor, rent, utilities, startup costs, etc.
Understanding what you can deduct—and how much—is important for any American small business owner. Your business classification might also impact your eligibility for deductions, so it’s important to do your research and keep track of all business expenses throughout each business year.
Pay estimated quarterly taxes
Based on how multiple factors like your tax rate, how much your business earns, and how much you spend, your taxes will fluctuate from year to year. However, you can estimate how much you’ll need to pay by paying quarterly taxes which are due on the 15th of April, June, September, and January.
You can determine how much you should pay in quarterly taxes by using form 1040-ES, or you can rely on accounting software or someone familiar with tax accounting to help you calculate it. Again, your business classification impacts how much you will owe in quarterly taxes, so it’s important to have a good understanding of what’s best for you.
Just as taxes are unavoidable, the variety of taxes you have to pay as a business can seem never-ending. There are all sorts of taxes you have to pay in order to operate each year, including:
You don’t have to pay a federal sales tax, but you’re likely required to pay a municipal or state sales tax, so it’s important to pay attention to the rules and tax rate in your area.
If you have employees, you’re required to pay taxes on their wages. Self-employment tax Self-employed workers are responsible for paying the full 15.3% FICA tax that funds Social Security and Medicare.
An excise tax only applies to certain products and industries (e.g., liquor, tobacco, gasoline), and the tax is often packed into the price of the item itself.
Just like your individual taxes, if your business owns real estate or the property upon which it does business, you have to pay taxes on it.
Having a solid understanding of American tax law is critical for any small business owner, but it’s wise to solicit the help of an expert in tax accounting before making any big business decision. Learn more about how you can take full advantage of every deduction and tax advantage available so you don’t find yourself in hot water at tax time. Being tax savvy also helps prepare your business for the unlikely event of an audit.
Contact an expert member of the Heartland Tax Solutions team to learn more.