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Small Business Tax Basics Explained

Understanding the nuances of US business taxes can save you money and keep you compliant with federal regulations. 

In this guide, we’ll cover the essentials of small business taxes, the types to be aware of, how to file, and potential deductions that can benefit your bottom line.

*Disclaimer: The content and answers of this guide provide a general overview, but tax laws and regulations can be complex. It’s always recommended to consult with a tax professional or accountant for specific guidance tailored to your situation.

What are business taxes?

Business taxes are taxes imposed on businesses and corporations by government authorities. 

These taxes are based on the business’s structure, operations, and location. Different types of businesses are subject to specific tax regulations and rates.

What are the types of business taxes?

Every business, regardless of its size, will have tax obligations. However, the type and amount varies.

  • Income tax: All businesses, except partnerships, must file an annual income tax return. Partnerships file an information return. The form you use depends on how your business is organized.
  • Sales tax: A percentage added to the sale price of products or services. Businesses collect this from their customers and remit it to the state or local government..
  • Self-Employment tax: Primarily for individuals who work for themselves. It covers Social Security and Medicare.
  • Employment taxes: If you have employees, you must pay their employment taxes. This includes withholding income tax and paying Social Security, Medicare, and federal unemployment taxes.
  • Property tax: A tax that a business needs to pay based on the assessed value of its owned properties, such as commercial buildings, land, or equipment.
  • Excise tax: This applies to businesses that manufacture or sell certain products, operate certain kinds of businesses, use various kinds of equipment, or receive payment for services.

Note: Nonprofits and cooperatives have distinct tax obligations to be aware of.

Filing your business taxes

With the right information and preparation, filing taxes can be smooth. First, be aware of deadlines, have all the necessary documentation, and understand your tax obligations.

Small business tax deductions and breaks

Understand and leverage small business tax deductions to significantly reduce your tax bill.

Employment taxes

If you have employees, you’re responsible for several additional taxes.

  • Federal income tax withholding: As an employer, you must withhold federal income tax from your employee’s wages.
  • Social security and medicare taxes: Employers must withhold a part of social security and Medicare taxes from employees’ wages and pay a matching amount.
  • Federal unemployment (FUTA) tax: This tax is not withheld from employee wages but is paid by the employer.

Check out these additional resources to understand taxes for different employee classifications.

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Tax implications for different business structures

Your business structure directly influences your tax obligations. Check out these resources to learn the unique tax implications of each structure.

Small business tax tips

Improve your understanding of business taxes with industry-specific tips and resources.

Taxes are just part of running a legitimate business

Understanding small business taxes is crucial for any entrepreneur. 

With the right knowledge and preparation, you can ensure compliance, optimize deductions, and set your business up for financial success.

But tax obligations are just part of the legal requirements you need to check off to start a business. While most can be completed in any order, here are some we recommend you explore:

Small business taxes FAQ

The tax rate for small businesses varies based on the business structure and total income. For sole proprietorships, partnerships, and LLCs, the income is typically taxed at the owner’s individual tax rate. Corporations may be taxed at a corporate rate, which can vary. Always check current tax rates and consult with a tax professional for specifics.

Yes, if you operate a small business, you must report its income and expenses on your tax return, depending on the business structure. Your specific form or schedule depends on how your business is organized.

Tax deductions reduce the taxable income for small businesses. Common deductions include rent, utilities, office supplies, employee wages, and business travel. Other potential deductions are home office expenses, vehicle expenses, and depreciation on business assets.

Owning a small business can impact your personal taxes in several ways. If you have a sole proprietorship, partnership, or LLC, the business’s profits or losses are reported on your personal tax return. This can increase or decrease your taxable income. Additionally, business owners can take advantage of specific deductions and credits that may not be available to regular employees.

Small businesses can reduce tax liability by using available deductions, credits, and tax planning strategies. This includes accurately tracking expenses, utilizing tax-advantaged accounts, and investing in tax-deductible retirement plans. Working with a tax professional to ensure compliance and optimize tax savings is essential.