Did you know that nearly 40 percent of business owners in the United States spend more than 80 hours each year on tax preparation? That’s almost two full weeks’ worth of time that you’d otherwise invest back into your business!
Unfortunately, there’s no way to get out of paying taxes. But there are a few things you can do to streamline the process. It all comes down to familiarizing yourself with the types of taxes you’ll have to pay and when you’ll pay them.
Here are the most common types of business taxes you may need to cover each year.
Business Income Tax
As long as your business earns money during the year, you’ll need to file a business income tax return. However, unlike your employees, your business is required to pay a portion of its income tax throughout the year.
The IRS expects you to make quarterly estimated tax payments that include your income tax estimates. Keep in mind that the amount you’ll need to pay and the type of return you’ll need to file will depend on the way you structure your business.
When calculating your estimated income tax, refer to your previous year’s earnings and tax liability. Look at what you owed the government for the entire year. Then, break that total into quarterly amounts to make sure the IRS won’t fine you for not paying enough throughout the year.
If you’re worried about overpaying or want to free up cash throughout the year, make sure you’re claiming as many deductions as possible and implementing tax planning strategies that will help you maximize your returns.
Businesses are only responsible for paying property tax on properties they own. If you rent your space, your landlord will be responsible for this tax. However, if you own the building, you’ll need to make regular payments to your county.
The amount you’ll pay in property tax depends on the value of the property you own. The higher its value is, the more you’ll have to pay.
Most businesses pay property tax each quarter. However, you may be able to make a lump sum payment at the end of the year when you file your tax return.
Self-employment tax is made up of two tax liabilities: Medicare taxes and Social Security taxes. When you work for another person, they’re responsible for paying a portion of that tax liability and withhold what you’re responsible for from your paycheck.
As a business owner, you’re responsible for covering the full amount yourself.
The current self-employment tax rate is 15.3 percent. You’ll need to make those payments quarterly to remain in good standing with the IRS.
If you have employees, you’re responsible for withholding the proper amount of taxes from their paychecks while also covering a small amount of those taxes as the business owner.
Employment tax withholdings include the following:
- Federal income tax withholdings
- State income tax withholdings
- Social Security and Medicare tax withholdings
- Federal Insurance Contribution Act (FICA) withholdings
Failure to withhold the proper amount for your employees may lead to fines from the IRS. Remember, the amount that you’ll have to pay is minimal. Your employees pay the bulk of these employment taxes through their regular withholdings.
If you sell physical products or taxable services, you’re responsible for collecting state sales tax for each state that you do business in. Ideally, you’ll collect these from each customer every time you make a sale.
The amount your customers pay will depend on the price of the item, where they’re purchasing, and local regulations and tax rates.
You’ll need to send these payments to the state regularly, but the frequency of those payments will depend on your state. If you’re not sure, check with your local Department of Revenue.
They’ll be able to tell you how much you need to collect and how often you need to submit payments to the state.
The Federal Unemployment (FUTA) tax is paid fully by the business owner for their employees. It’s not withheld from the employees’ paychecks.
The tax is your contribution to make sure that employees who are eligible for unemployment benefits can use them.
This tax is required for each employee that works more than 20 weeks each year or earns $1,500 per quarter. That said, you’re only required to pay six percent of the employee’s first $7,000 earned each year.
Typically, you’ll need to pay these taxes quarterly.
Capital Gains Taxes
The capital gains tax is levied on any profits earned from investments or the sale of a business. If your business sells any of your investments, you may need to pay capital gains tax on the amount that those investments appreciate or grow in value. If you sell your business or a portion of your business, you may need to pay capital gains tax on the profits earned from that sale.
Most business owners will need to pay the capital gains tax when they file their business tax returns at the end of the year.
Be Ready to Cover These Types of Business Taxes
Now that you know the most common types of business taxes you can expect to pay, you’re ready to create a strategy to help you stay on top of those quarterly payments each year.
By planning ahead and making your payments on time throughout the year, you’ll avoid penalties from the IRS with ease. However, that doesn’t mean you have to handle everything on your own.
If you’re ready to create a comprehensive tax plan for your business, schedule a free consultation with us today.