Business, Entrepreneur, Startup

A Closer Look at the 4 Different Types of Business Taxes

With the number of bills and receipts that go in and out of a business, it’s normal to look into tools that can assist the tracking and monitoring processes. After evaluating tools found in tax software comparison blogs, business owners or accounting departments may find themselves integrating their chosen application in their operations. In doing so, documents are properly stored and organized in preparation for the next tax season.

However, in order to properly prepare, it’s important to understand the different types of taxes businesses deal with. Here’s a closer look at them:

Income Tax

Don’t Get Audited! What Every Small Business Owner Should Know About Taxes

Except for partnerships, all businesses need to file their income tax returns annually. For partnerships, they must file an information return. In some states, businesses are required to pay income tax according to their legal business structure.

Businesses need to pay their federal income tax as they earn income throughout the year. Typically, taxes are withheld from an employee’s salary. Failure to submit enough withheld taxes will lead them to pay an estimated tax. 

Estimated Tax

Estimated tax payments are generally paid when:

  • Individuals or sole proprietors, partners, or S corporation shareholders expect that they owe at least $1,000 on the day they file their tax return
  • Corporations expect to owe at least $500 on the day they file their tax return

On the other hand, individuals are exempt from estimated tax payments during the year given they meet these criteria:

  • They were a US resident or US citizen for the entire year
  • The prior tax year lasted for a 12-month period
  • The prior tax year did not have any tax liability. This means that tax returns were not filed or had a total tax amount of zero.

In the absence of an estimated tax, businesses can pay any due taxes upon filing an income tax return.

Excise Tax

Certain business types are required to pay an excise tax that depends on their manufactured or sold products, products and equipment used, business operations, and payment on certain services. A few examples are taxes on communications and air transportation, fuel, environmental taxes, and tax on the first retail sale of tractors, heavy trucks, and trailers.

Employment Taxes

Employers are responsible for covering their employees’:

  • Federal income tax withholding
  • State employment taxes 
  • Temporary disability insurance (for businesses in Hawaii, California, New York, New Jersey, and Rhode Island)
  • Half of the employees’ social security and Medicare taxes
  • All the employees’ federal unemployment tax (FUTA)

Unemployment Tax

Employers pay unemployment taxes to the government as a contribution to the fund for unemployment benefits. The amount varies depending on the business type. Meanwhile, employees’ benefits are primarily administered by the Unemployment and Training Division from the US Department of Labor. 

The Internal Revenue Service (IRS) manages the employers’ unemployment taxes while the state unemployment agencies handle similar programs on their own.

Self-Employment (SE) Tax

Self-employed individuals are labeled as independent contractors, owners of a sole proprietorship, or simply conducting business for themselves. They are mandated to contribute taxes for their social security and Medicare. Keep in mind that 12.4% of the total 15.3% self-employment task is dedicated to social security while the remaining 2.9% is dedicated to Medicare. Other benefits include disability and hospital insurance, retirement benefits, and payments to a survivor in the event of the payee’s death.

Individuals are required to file Schedule SE or pay SE tax if they meet one or both criteria:

  • Their self-employment earnings reach $400 or more
  • They work for a church or church-controlled organization that is exempted from social security and Medicare taxes
  • They get paid $108.28 or higher from the qualified church or organization

Workers who provide care and other in-home services (caregivers) for the elderly or disabled individuals are taxed differently. Employers may waive their employment taxes if the caregiver is a family member. However, in cases where caregivers are not deemed employees, caregivers are still required to report their compensation as income.

Keep in mind that there are also exceptions and special rules in place for the notary public, fishing crew members, aliens, local and state government employees, and international organization or foreign government employees.

Get Ready for the Next Tax Season

Small Business Tax Deductions And Your Design Business

New business owners, whether they offer freelance services or run corporations, may find themselves swamped by paperwork detailing their income and expenses. In this case, it’s important that they account for each of these transactions and any tax deductions as they come along. In doing so, they will be well prepared even before the start of the next tax season, regardless of the kind of tax they have to pay.

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