Millions of people became entrepreneurs during the pandemic. At least 1.4 million of them, in fact.
They realized the dream of being their own bosses and working for themselves. They wanted to pursue a passion that made them want to jump out of bed every day.
What they didn’t realize was the responsibility that came with that. Taxes are the first thing they have to figure out.
If this sounds familiar, you might be scrambling to figure out the types of taxes and how much you need to pay before Tax Day.
It’s coming up quickly, and if you’re not careful, you’ll get hit with fines and penalties from the different tax authorities.
How do you know what you owe? Don’t panic, just keep reading this guide to small business taxes. You’re about to learn the different types of taxes and how to prepare for filing taxes.
1. Income Taxes
Income taxes are standard taxes that everyone pays on earned income for salary, capital gains, investments, and other sources of income.
Sole proprietors and LLCs are usually considered pass-through entities. This means that the business itself doesn’t pay income taxes.
Sole proprietors and LLC shareholders report business income on their 1040 forms. Some types of businesses and corporations pay taxes on the net profit.
2. Self-Employment Taxes
This is one of the big surprises for newly self-employed people. That’s because when they worked for someone else, they had these taxes withheld for them.
What are these taxes? These are an employee’s Social Security and Medicare contributions. By law, employees have to contribute 1.45% of income for Medicare and 6.2% for Social Security.
Employers pay part of your contributions, too. That also amounts to 1.45% of income for Medicare and 6.2% for Social Security.
Since you’re self-employed, you’re the employer and the employee. Therefore, you’re responsible for both parts of the contributions, totaling 15.3% of your profit.
3. Estimated Taxes
Estimated taxes are the taxes you pay in advance. The IRS requires estimated taxes to get paid if you’re going to owe more than $1,000 in taxes.
If you’re working for yourself, you’re probably going to owe more than $1,000. It’s a challenge to estimate your taxes if you’ve never filed business taxes before.
You can use your past year’s taxes as a guide. Look at how much you paid in taxes and divide by four. That gives you a guideline to start with if your income remains the same.
You can always consult with a CPA for guidance if you’re not sure.
4. Payroll Taxes
You learned that self-employed people have to pay their share and an employer’s share of Social Security and Medicare contributions.
How does that work if you have employees? You withhold those contributions from employees’ earnings and match those contributions.
You then submit these payments as payroll taxes. These get paid monthly, bimonthly, or quarterly depending on your situation.
5. Sales Taxes
There isn’t a federal sales tax, but most states and municipalities have local sales taxes. Customers pay sales taxes at the point of sale.
Businesses collect those taxes and report them to their state and local tax authorities.
That’s not a problem for brick-and-mortar retailers.
Where things get complicated is with ecommerce businesses. Ecommerce businesses didn’t have to pay sales taxes from out-of-state customers for years.
That changed in 2018 because of a landmark Supreme Court decision that allowed states to tax ecommerce shoppers.
You may have to pay sales taxes in a state if you have a nexus there. For instance, a physical presence, contractors, warehouse, dropshipper, or affiliates.
You may have an economic nexus in a state if your sales reach or exceed a certain threshold.
6. State and Local Taxes
Each state and municipality have its own laws regarding taxes. Some states have no income taxes while others have a progressive tax system.
Check the laws in your state to find out what the tax obligations are. Your local chamber of commerce and SBA office are great resources to start with.
7. Property Taxes
If your business owns a property, you have to pay property taxes. This works similarly to paying residential property taxes.
The good news here is that businesses can usually write off property tax payments as a deduction.
What if you work from home? You can’t write off property taxes, but you can deduct home office expenses.
8. Excise Tax
You may have to pay a federal excise tax. This is mostly for businesses in the transportation, fuel, alcohol, and tobacco industries.
This is a type of sales tax. The difference is that a sales tax gets applied to all goods where an excise tax has specific applications.
How to Prepare for Tax Season
As you just learned, there are many different types of small business taxes. You have the added responsibility of filing and paying your taxes on time.
The IRS and other tax agencies assess interest and penalties even if you’re a day late.
Start getting your documents together. You’ll need all of your expense receipts, income statements, invoices, and tax statements.
Calculate Income
This is the simple part. Calculate all of your income earned during the year.
Don’t forget to include any payments made through PayPal, Venmo, or other digital apps. The IRS is now tracking these payments.
Any earnings over $600 get reported to the IRS. You have to report the income anyway, the IRS is keeping closer tabs on these payments.
Claim Deductions
The next part is to claim tax deductions. Remember, small business taxes get paid on the net income. You have to subtract business expenses from income.
You can write off any business-related expense. Advertising, qualified home-office expenses, insurance, rent, utilities, equipment, supplies, legal and professional fees, and more.
Make sure that you maintain good records because you’ll need to produce proof of business expenses during an audit.
Tax Credits vs. Tax Deductions
Some businesses might be eligible for tax credits. Tech companies, construction, manufacturing, engineering, and cannabis businesses may qualify for additional tax credits.
Tax credits lower your tax liability more so than deductions. Deductions lower your income while a tax credit lowers the amount of taxes owed.
Let’s say that you have a $1,000 deduction on $25,000 of income. Your taxable income is $24,000.
A tax credit gets applied to your tax bill. If you have a $5,000 tax bill and a $1,000 tax credit, your tax bill becomes $4,000.
That’s why it’s important for small business owners to know what they’re eligible for and claim these tax credits.
Tax Systems for the Self-Employed
Self-employed people struggle to understand taxes, especially early on. You don’t want to get caught off-guard with a large tax bill.
Develop a system for paying taxes. The most successful self-employed people take a proactive approach.
They have a separate savings account specifically for taxes. Once a month or every time they get paid, they transfer a percentage of funds to the savings account.
When it’s time to pay taxes, they’re fully prepared. You should develop a similar system for your business. It reduces stress and you’ll handle paying taxes with ease.
Understand There Isn’t Tax Season
What’s the number one mistake small business owners make when it comes to filing taxes? They only think about taxes between January and April.
They don’t have a plan or strategy around paying taxes, so they miss out on deductions and credits.
Don’t make this mistake. Check-in with your tax advisor at least once during the year. Usually, the end of the second and third quarters are the best times to review your taxes.
You’ll understand how much you’re likely to owe and take action to limit your liability. For instance, you might decide to make a big business purchase a little earlier for the tax break.
It gives you plenty of time to review your taxes and make sure you set aside enough money for tax payments.
Know the Different Types of Taxes for Your Small Business
Even if you run a small business, you can’t get away with not paying taxes. It’s part of the way of life. You earn an income, you pay taxes on that income.
It’s a little different for small businesses. There are different types of taxes that have to get paid. Depending on the type of business and location, you may have payroll taxes, sales taxes, property taxes, and state taxes.
It’s a lot to handle and figure out, which is why you should seek help from tax experts. You’ll end up saving on taxes and always filing taxes on time.
For more business advice, click on the Business tab at the top.
Amanda Byers is a graduate of Columbia, where she played volleyball and annoyed a lot of professors. Now as Zobuz’s entertainment and Lifestyle Editor, she enjoys writing about delicious BBQ, outrageous style trends and all things Buzz worthy.
