Remember, not only does a business need to pay appropriate taxes, there are laws regarding how these taxes should be reported and paid. It’s best to first determine exactly which taxes a business is responsible for paying.
According to www.irs.gov, there are five general types of business taxes:
• Income Tax
• Estimated Taxes
• Self-Employment Tax
• Employment Taxes
• Excise Tax
The management of income taxes is likely one of the biggest considerations when thinking about a new business and its taxes. It’s important to note that all businesses (except partnerships) must file annual income tax reports. A company’s business structure determines how taxes are paid. Take a look at this list of business structures with corresponding income tax info:
Sole Proprietorships: This type of company is an individual’s unincorporated business. The tax obligations are reported via the owner’s regular individual tax return. Self employment taxes may be applicable but are still incorporated into the owner’s personal tax documents.
Partnerships: Even though an income tax report is not needed for the actual company that is set up as a partnership, an information return must be filed. Incidentally, the individual partners that operate a company as a partnership file business-related income taxes via their own personal tax returns.
Limited Liability Corporations (LLCs): Tax regulations for LLCs can vary by state, so it’s a good idea to consult with a local tax expert on how to handle LLC tax reporting. However, there are two general guidelines to keep in mind. First, the IRs can recognize an LLC as either a partnership or corporation. Second, an LLC with at least two members is automatically treated as a partnership unless the business owners file IRS forms that request a corporation classification.
Corporation: When a business is set up as a corporation, the company can be run as a C corp or an S corp. When considering income tax reporting, keep this in mind: A C corp is its own business entity and pays its own taxes. However, with an S corp, the income tax obligations flow through to the individual shareholders.
Chris Cannucciari, CPA for LCS&Z, LLP in New York, further explained tax rules for S corps and C corps. “There can be a double taxation on C corps because a C corp pays tax on its earnings plus the distribution of earnings is also taxed,” he said. “S corps have certain restrictions but no double taxation. So, I’m often advising that small businesses set up as S corps.”
One of the above mentioned S corporation restrictions is that there can only be up to 100 shareholders. Certain types of owners can also be excluded from an S corp.
When a company grows to the point of becoming public and/or the number of shareholders surpasses 100, the business must become a C corporation.
Income taxes are not the only tax consideration on business entities. Below is a description of additional business-related taxes:
Estimated taxes is the term that describes the practice of paying taxes on the income that is earned throughout the year. Basically, you have you pay as you go. Estimated taxes are paid through withholdings or actual payments throughout the year. Self-employment taxes should also be included in any estimated tax obligations.
Employment taxes must be paid when a business has employees and these payments are for things like Social Security, Medicare, federal income tax, etc. The employer is usually responsible for withholding these amounts and for filing the appropriate forms.
Excise taxes are probably something that most entrepreneurs don’t have to pay. This type of tax is paid only on certain things like gasoline or highway usage by trucks. Visit the irs.gov website for more detailed information about the goods and services that are subject to excise taxes.
State taxes can be a consideration for businesses, just like they are on an individual’s return. Consult with a tax advisor or research state tax filing forms in order stay compliant with a business’s state tax payments.
In fact, business owners should think about seeking the advice of a CPA or other tax professional. Tax regulations can be complex, especially for corporations. Visit irs.gov and sba.gov for the most up-to-date tax information and filing instructions.