4 Business Taxes About Which Every Small Business Owner Should Know

Depending on the type of small business that a person owns, he or she will owe different business taxes to the federal government. To begin with, there are several types of businesses, as listed below:

Sole proprietorship. This type of business is unincorporated and is owned by one person. Apart from its owner, the business has no existence. Likewise, all the profits, losses, and liabilities of the business are also the business owner's personal profits, losses, and liabilities. As a result, the sole proprietor simply declares his or her business's profits as his or her own income on the tax form.

Partnership. A partnership is much like a sole proprietorship except that it is a business that is shared by two or more partners. Each partner contributes a given amount of money, property, time, and labor, and each partner receives a share in the business's profits. Just like with a sole proprietorship, each partner is personally liable for the financial welfare of the partnership, regardless of whether that includes profit or loss. Also, partners are personally taxed for the income generated by the business.

Corporation. A corporation is a separate entity wherein stockholders pool together their money and/or property to create the company's capital stock. Profits generated by the corporation are taxed twice: first, to the corporation, and second, to the shareholders when they receive the profits as dividend income. Corporate losses, however, are not deductible by the shareholders.

S Corporation. An S corporation operates much like a corporation except that its tax structure is different. The S corporation avoids double taxation by having its shareholders report their share of the corporate income, deductions, and losses, as well as their own personal income, deductions, and losses.

Limited Liability Company (LLC). An LLC's members can include individuals, corporations, and even other LLCs. A single member may also own an LLC. Membership is not limited to a maximum number of members. In an LLC, members have limited personal liability in the corporation's losses. They also can elect to "pass-through" the corporation's taxes so that the corporation itself is not taxed (1). Instead, the company's members receive the company's profits and are taxed on them. Because an LLC can elect to be treated as a sole proprietorship, partnership, or corporation for the purposes of taxation, this form of business may be the most advantageous for tax purposes.

Given these five types of businesses, four different taxes are owed per each small business owner. The different taxes are listed below.

Income Tax. Except for partnerships, which file an income statement, all business owners must file an income tax return. Income tax, which also includes self-employment tax, can be paid continually as earnings are totaled, or the business owner can pay regular (usually quarterly) estimated taxes. It is best not to wait until the end of the year before paying taxes, since the IRS will likely charge a penalty fee if earnings go over a given amount. Conversely, if the business owner overpays on income or estimated taxes, he or she can always file a tax return.

Income statement. Partnerships that make or receive payments need to include an income statement on a separate IRS form. The IRS will then compare the business's payment information against employee income returns.

Self-Employment Tax. Self-employment tax (SE tax) consists primarily of social security and Medicare tax, both of which are paid for the benefit of the self-employed business owner(s). In essence, SE tax contributes to the business owner's coverage under the social security system. That social security eventually provides retirement, disability, survivor, and Medicare benefits. Nearly every business owner that pays income tax also pays SE tax, unless his or her business earnings are less than $400. For churches or church-controlled businesses, SE tax must be paid if earnings are $108.28 or more (1).

Employment Taxes. Any business that has employees must have them pay employment taxes (2). These include the following:

Social security taxes

Medicare taxes

Federal Income Withholding Tax

Federal Unemployment (FUTA) Tax

Employees are required to pay only the first three taxes from their own income. FUTA is paid by the employer. However, the employer must fill out all the required forms and then deposit the withheld monies. Deposits can be mailed to an authorized depository for federal taxes, or they can be sent electronically via the Electronic Federal Tax Payment System (EFTPS).

Excise Tax. Excise tax is a special additional tax that is paid if the business manufactures or sells specific products, operates a certain kind of business, uses specific equipment, facilities, or other products, or receives payment for specific services (1). The Quarterly Federal Excise Tax Return provides examples of what constitutes these specific products, businesses, and services. Some examples include products such as fuel, heavy trucks, trailers, and tractors, businesses such as communications, wagering and betting, and services such as air transportation and lotteries.

References:

1. IRS: Business Taxes http://www.irs.gov/businesses/small/article/0,,id=98966,00.html

2. Small Business Tax Information http://www.bizmove.com/starting/m1a8.htm#5