If you think filing individual taxes can be complicated, it can be even more complicated for businesses who must pay different types of taxes for federal, state and local.
Taxes range for different types of businesses and business activities — such as whether or not you own business property, whether or not you have employees and whether or not you sell taxable products or services. If you are a startup, knowing what taxes are expected to pay is key to managing your financial future.
Federal income tax
Federal income tax is the tax you pay on earnings to the IRS. The only entity that pays Federal income tax directly is the C-Corp, all other businesses are taxed at the Federal level via the owner’s individual tax return.
State income tax or franchise tax
State income tax is the tax paid on earnings to the state where your business resides, or to other states where your business has nexus. Also called “sufficient physical presence,” nexus is an incredibly complicated legal topic that refers to the requirement for companies doing business in a state to collect and pay tax in that state. Be sure to consult your trusted accountant when considering what states your business needs to pay taxes to.
Local income taxes or license fees
Some cities, counties and municipalities tax business earnings. It’s important to know which ones, and what triggers the tax. Much like state income tax, this can be a complicated issue which requires research and you’ll want to consult a trusted accountant.
Sales taxes are generally only paid by a business via the products and services they purchase for input costs. On products and services that a business sells which are subject to sales tax, the business acts as a pass-through. The business will collect the sales tax at the point of sale from the customer, and then remit the tax collected to the taxing agency.
Sales tax has become a very complex subject, especially after the Wayfair decision in June 2018 in which the Supreme Court ruled that allows states to tax remote sales. Before, states could only tax sales from businesses with a physical presence in their states. This court decision reveals that financial business activity can trigger a sales tax. A trusted accountant will help you navigate this complex tax issue and implement software to automate this function of your business.
Payroll taxes are the employer’s half of Medicare and Social Security tax that are paid on employee wages. The total payroll taxes are 15.3%, 12.4% of which is Social Security, and 2.9% is Medicare. As an employer, your portion is 6.2% for Social Security and 1.45% for Medicare. The employee has the other half withheld with their paycheck.
Business property taxes
Some states and localities, such as South Carolina, will tax the amount of property your business has, such as your fixed assets that are purchased for long-term use and not likely to be converted into cash such as buildings and equipment. This is a tax that not many business owners consider when starting their business, so make sure you research this beforehand.
Excise taxes are taxes paid on a specific good, the most common example being gasoline. There are many kinds of excise taxes, some of which include:
- Oil spill liability tax
- Sports wagering
- Aircraft management services
- Indoor tanning service
- Importation and manufacture of fishing and archery products
- Idling reduction devices
You should be aware of them and research whether or not the product your business sells is subject to them.
The self-employment tax is the payroll tax times two, consisting of Social Security and Medicare taxes primarily for individuals who work for themselves. Sole proprietorships are subject to the full self-employment tax, which means you’ll pay the full 15.3% on your profits from the business, not just the employer or employee’s 50% share (7.65%). This is a significant expense, and a good reason to elect S-Corp status to shield some of the earnings from this tax.