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Business Tax Basics

Self-employed people who are starting a small business, have an established small businesses – as well as larger organizations – are required to pay taxes differently than individuals. The type of business determines what taxes must be paid and how. The common business types are:

  • Sole proprietorship
  • Partnership
  • Corporation
  • S Corporation, and
  • Limited Liability Company (LLC)

Apart from certain exceptions, most businesses are required to pay the following business taxes:

  • Income tax
  • Estimated tax
  • Employment tax
  • Self-employment tax
  • Excise tax

Income Tax

All businesses except partnerships are required to file an income tax return. Partnerships file an information return. Depending upon your business structure, you are required to file a specific form to report your income.

You can withhold taxes from employees’ paychecks and deposit them to the IRS. If you are not able to pay your entire taxes through withholding, you may need to pay estimated taxes.

Estimated Tax

Sole proprietors, partnerships, S corporation shareholders and/or the self-employed can pay estimated taxes. Payment can be made by phone or online, by check or money order, or by credit or debit card. You may use Form 1040-ES, Estimated Tax for Individuals to calculate and pay estimated taxes. Normally, estimated tax payments are made four times a year on the following dates: April 15, June 16, Sept 15, and Jan 15.

When paying estimated taxes, you need to be careful about accuracy. If you owe more than you pay, the IRS will begin to charge penalties on the balance after the payment deadline expires. Therefore, it is critical to calculate all taxes accurately or you will ultimately pay more than you owe.

Employment Tax

As an employer, you are required to pay employment taxes, which include:

  • Social security and Medicare taxes
  • Income tax withholding, and
  • Unemployment tax under the Federal Unemployment Tax Act (FUTA)

Failure to withhold and deposit the correct amount of taxes may result in IRS penalties.

Self-Employment Tax

Those who are self-employed need to pay self-employment tax (SE tax), which covers social security and Medicare tax. Usually, if your net earnings from self-employment are $400 or more, you will need to pay SE tax.

Different rules apply for churches, a qualified church-controlled organization, aliens, state or local government employees, notary publics, fishing crew members, and foreign governments or international organization employees.

Excise Tax

Excise tax is only paid if you manufacture or sell certain products such as gasoline, use various kinds of equipment or products, receive payment for certain services, or operate certain kinds of businesses. There are also excise taxes on activities such as gambling or highway usage by trucks. For the latter, you may consider using extended fuel tax credits to get a reduction.