Taxes for Small Businesses Explained in Simple Words

Taxes for Small Businesses Made Easy

Posted 4 years ago by Max Komonov

Deciding to听start a听small business can be听a听daunting task. Many new business owners don鈥檛 know what to听expect, which can cause some anxiety or听fear. Business owners have to听keep up听with records and听make sure their taxes are recorded correctly. For these and听other reasons, lots of听new small business owners find themselves fretting over their taxes.

Understandable. But not inevitable! We听are here to听help ease any听anxiety or听fear when it听comes to听doing your taxes as听a听business owner. And we鈥檙e here to听tell you that there are a听ton of听ways to听take the听stress out of听the听season, from business write-offs to听getting organized ahead of听time! If听you start out on听the听right foot and听record your expenses as听you go, you may actually be听amazed at听how much you can save.

What Factors Determine Your Taxes?

There are two main factors that determine how much tax, the听legal entity you choose to听create your business under, and听the听state you operate your business in.

Legal entity

When you set up听your business there are four main legal entities you can choose from. Your choice will impact how you pay your taxes and听what tax rate you will have to听pay.

Sole proprietorship

If听you choose to听run your business as听a听sole proprietorship your business taxes will not be听separate from your personal taxes. The internal revenue service (鈥淚RS鈥�) will not recognize your business as听a听separate legal entity for听tax purposes. There are a听few tax deductions you can take advantage of听as听a听sole proprietorship, however, since your business is听not legally separate from you as听an听individual it听can be听difficult to听determine if听you qualify for听certain tax deductions. For this reason, it听is听not advised that you continue your business as听a听sole proprietorship long term. You could be听losing out on听a听lot of听savings each year with your taxes.

Partnership

Similar to听the听sole proprietorship, a听partnership鈥檚 income is听not taxed as听business income, rather each partner will report their share of听the听business鈥檚 income as听their own personal tax returns. If听you have more than one member it听is听usually recommended by听professionals that you consider registering as听an听LLC or听incorporating your business.

LLC

The LLC is听often the听most recommended for听small businesses. It听is听the听perfect mixture of听a听partnership and听a听corporation. You can choose how you want to听be听taxed. You can either use the听LLC as听a听pass-through entity or听be听taxed as听a听corporation. Most entrepreneurs will decide to听use the听LLC to听be听taxed as听a听pass-through entity rather than a听corporation because you can avoid double taxation.

Corporation

Corporations often get the听short end of听the听stick when it听comes to听taxes as听an听individual with a听business. If听you own a听corporation, you have to听pay a听corporate tax on听the听business income as听well as听pay tax on听your income you were paid by听the听corporation. If听your business is听still relatively small most of听the听time it听is听better to听stick with the听LLC option rather than incorporate your business. If听you are not sure which would be听best for听your situation, consider reaching out to听a听business or听tax professional before making the听leap to听incorporation.

State taxes

The second factor that will have a听big impact on听your taxes is听your state鈥檚 income tax rates and听business tax laws. There are some states that are very business-friendly when it听comes to听taxes and听others that want to听squeeze every penny they can out of听your business.

Business-friendly states include: Florida, Nevada, New Hampshire, Utah, Alaska, and听South Dakota. Some states you may want to听reconsider include: California, Arizona, Louisiana, New York, New Jersey, and听Vermont.

The treatment of听taxes and听businesses varies greatly from state to听state. For example, Nevada does not have an听income tax or听corporate tax. Additionally, New Hampshire has no听sales tax. If听you are wanting to听open a听storefront that sells products you may want to听consider New Hampshire because you won鈥檛 have to听worry about paying sales tax on听anything.

On听the听other hand, there are some states that you may want to听avoid doing business in听if听you can. California and听New York have some of听the听highest tax rates in听the听United States, which will eat into a听big portion of听your profits. New Jersey has the听highest property tax in听the听United States, making it听a听place to听avoid if听you are going to听have a听physical location. New Jersey also has the听second highest corporate income tax, so听you may want to听reconsider it听if听you are thinking of听incorporating your business.

Business Taxes You Should be听Aware Of

As听a听business owner, your taxes will look different than the听average person who is听an听employee working for听someone else. One benefit of听being an听employee is听you can go听almost the听entire year without worrying about your taxes. You get your W-2听in听the听mail from your job and听that is听all you need to听file your federal taxes and听state income taxes. However, as听a听business owner, there are some taxes that you will be听responsible for听now. These taxes include:

Self-employment tax

As听a听business owner, you still have to听pay medicare and听social security tax on听your income. For federal taxes, the听self-employment tax rate is听15.3% of听your business鈥檚 net income for听the听year. You will also have to听pay state income tax, but this will vary depending on听your state鈥檚 income tax rate.

Payroll tax

If听you have employees you will have to听make sure to听withhold federal income tax, Medicare, and听social security properly from your employees鈥� paychecks.

Excise tax

Depending on听your business you may owe an听excise tax. This is听a听federal government tax on听businesses that manufacture or听sell certain products. It听may also apply if听you use certain equipment, facilities, or听products.

Sales tax

Sales tax is听a听state tax that any听business may have to听pay if听they sell goods. Some states still like to听tax you if听you perform services. Make sure you register your business to听help make sure you are paying taxes properly and听look up听your tax rate so听you know how much to听set aside in听order to听pay your taxes.

Property tax

Property tax is听another state tax that you may or听may not have to听pay depending on听whether you own a听building that you do听business out of听and听which state you live in. Property taxes vary widely across the听United States, if听you are considering purchasing a听business building, you may want to听check the听state鈥檚 property tax.

Benefits of听Paying Tax as听a听Business

While taxes seem like a听pain (as they normally are), there are some benefits of听being a听business owner rather than an听employee. This comes in听the听form of听expenses and听write-offs. While you have the听burden of听tracking all these expenses and听write-offs if听you create a听system that works well and听helps you stay organized you may find yourself actually enjoying taxes. Well, maybe we听shouldn鈥檛 go听that far. But at听least you can make the听process bearable!

These write-offs can be听a听number of听things: if听you do听business over golfing, that counts as听an听expense! If听you take all your employees out to听lunch and听pay for听their meals, that is听an听expense. If听you use part of听your house for听your business, that can be听an听expense. Keeping up听with all these different kinds of听expenses can really save you a听lot of听money when it听comes time to听pay taxes.

Here is听a听very simple example to听show you how being a听business owner can save you money.

Unlike an听employee, businesses get the听benefit of听deducting their expenses prior to听being taxed. For example, say an听employee makes $100听a听day and听is听taxed at听a听10% rate and听they want to听go听out to听eat with some co-workers at听lunch. That lunch costs them $15. These co-workers even discuss work while out at听lunch. So听after taxes that employee has $90听leftover, and听then spends the听$15听for听lunch. Now that employee is听left with $75.

On听the听other hand, say you are the听business owner. You make $100听that day and听are taxed at听a听10% rate. You decide to听go听to听lunch with some of听your employees and听you discuss work. You spend $15. Well that $15听is听an听expense! So听you would take your $100听write off the听$15听and听you鈥檙e left with $85听and听then taxes hit. So听rather than being taxed $10听you are only taxed $8.50. So听you are left with $76.5.

While this example is听a听simplified version, it听does show the听power of听expenses and听writing those off. These expenses tend to听be听higher than just $15听and听tax rates don鈥檛 tend to听be听as听high as听10% but we听wanted to听keep the听math simple.

Conclusion

These tips are to听help you start thinking of听how to听handle your taxes as听a听business, and听to听get oriented with some basic tips. Always seek tax advice from a听tax professional if听you have specific questions about your business鈥檚 taxes. At听any听rate, we听wish you the听best of听your business venture, and听encourage you to听have no听fear about getting those taxes done!

To听help you out with taxes, 黑料门 can for听merchants in听the听USA, the听EU, Canada, Australia, and听New Zealand.

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About The Author

Max has been working in the ecommerce industry for the last six years helping brands to establish and level-up content marketing and SEO. Despite that, he has experience with entrepreneurship. He is a fiction writer in his free time.

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