As the owner of a small business, you need to understand how commercial taxes work. If you don’t, you will end up filing your taxes incorrectly or overlook some taxes altogether and risk punitive action by the Internal Revenue Service (IRS).
Navigating the intricacies of commercial taxes may require some expertise from a more experienced head. Bringing in a tax consultant will help you get your business started on the right footing with the IRS.
What are Commercial Taxes?
Any entity engaged in a profit-making activity is liable to pay taxes as long as it generates revenue. Small business commercial tax obligations are generally smaller than those of large corporations, and the process of filing returns is thus less complicated. However, it still needs to be done according to the prescribed format. You, therefore, need to keep your records well and file accurately.
The type of business you run will determine the kind of taxes the IRS requires you to pay. Small businesses, regardless of which industry they operate in, will be required to pay the following:
- Income Tax: You are required to file an income tax return every year. The structure of your venture will determine how you need to file your returns. You can register your business as a sole proprietorship, partnership, corporation, S-corporation, or limited liability company (LLC). Make sure to pay income taxes as you receive income throughout the year.
- Estimated Tax: As a small business owner, you have to pay estimated tax since you don’t have an employer who withholds income tax from your paycheck every month. Make sure to be careful to estimate accurately as failing to pay sufficient tax may result in a penalty.
- Self-employment Tax: This is a form of tax that benefits you directly. Since you don’t have an employer who deducts social security or medicare payments from your paycheck, self-employment tax covers your contribution to these two funds. As a result, you will be able to claim medical benefits if you or any of your dependents need medical care. Once you reach retirement age, you will be able to enjoy these benefits.
- Employment Taxes: If you have employees, you will need to withhold employment taxes on their behalf. In addition to income tax from the wages they earn, you need to withhold deductions for your employees’ medicare and social security.
These deductions are covered under FICA, the U.S. federal payroll tax, which you are required to withhold from your workers’ paychecks. FICA, or the Federal Insurance Contributions Act, and its contributions are linked to your employees’ social security numbers.
You also will need to remit the federal unemployment tax (FUTA) for your employees.
- Excise Tax: What you pay in excise tax will be determined by the nature of your business. Excise Tax categories are listed in Form 720, which you will use to file this tax. You are required to file Form 730 or 2290 if your business is in the wagering or transportation industries, respectively.
Federal Income Filing
To file commercial taxes for your business, you need a tax ID or an EIN (employer ID number). This applies even if you’re running the company as a sole proprietor with no employees. Once you have this, you will be able to remit employment taxes. But for the remission to be done, your employees will need to fill Form 1-9 and W-4 first.
After you have collected and filed these forms, you will know the amount you need to pay in employment tax. If you don’t have any employees, you will need to file a self-employment tax form. You can attend one of the IRS webinars if you need further guidance on the kinds of business tax that apply to you and how to file these returns.
State Income Filing
State income filing requirements vary from state to state, but most states will require you to file state returns if you have filed federal income tax. While some states require everyone to file income returns, others don’t if you made no income or received earnings below a certain minimum. Look up the state income filing requirements for where you reside at the state and county levels to be on the safe side.
Tax Credits and Write-offs
As a fledgling business owner, make it a goal to keep expenses as low as possible. You’ll want to discover and take full advantage of any tax credits and write-offs that apply to you. Getting your business to qualify for tax relief starts with selecting one of the business structures listed above. Corporations, partnerships, and sole proprietorships all have different tax requirements.
Registering your enterprise as a sole proprietorship, for instance, will allow you to deduct up to 20 percent of your business’ net income from your taxable income.
Instead of cracking their heads over their businesses’ tax requirements, some business owners opt to bring in licensed CPAs for tax accounting. With a certified public accountant working your books, you can rest assured that your venture will be fully compliant with federal, state, and local government tax obligations. Your CPA will also help you secure the maximum amount of tax credits and write-offs to which you are entitled.
The Right Help
It is important that you entrust your tax issues to a reputable, experienced CPA with a proven track record. Before you select an accountant, be sure to check their background. Those with positive reviews or testimonials should be the only ones to make your shortlist.