Business Tax Types

Tax season is your favorite time of the year, right? Either way, it’s a good idea to get familiar with some of the most common types of taxes businesses pay. That said, this is not tax advice, and I strongly recommend hiring a tax professional to help you navigate the complexities of your individual situation. Let’s jump right in.

Income Taxes

This one is pretty easy to conceptualize because even individuals pay this tax. Unlike individuals, though, businesses do not pay income tax on their income. Instead, it is paid based on the profits you generate as a business. That is to say, after taking in revenue (income) and paying all related business expenses, you are left with some amount of money. That is the amount on which you pay income taxes. When you hear about someone “writing off” a business expense, this is why they do it. It lowers their tax burden because the additional expense reduces the amount of profit on which the business owes taxes. I’m not sure why they don’t just call them profit taxes, but here we are. There are special adjustments that your accountant will make for certain expense categories, but we’ll leave that to them and not get into it here.

• Federal Corporate Income Tax - this is the tax you pay to the federal government and is collected by the United States Treasury. The Internal Revenue Service (IRS) is a bureau of the Treasury and is responsible for collecting and reviewing the forms and deposits associated with these taxes.
• State Corporate Income Tax - each state has the option to set its own state corporate income tax rate. Some states, such as Texas, choose not to have a state corporate tax rate. This is one of the more important considerations when choosing where to domicile your business, as it can have huge implications on the amount of money you have to pay to do business there.
• Franchise Tax - this is sometimes referred to as a “privilege tax”. It is paid for the privilege of doing business in a state. In Texas, for example, there is no state corporate income tax, but there is a franchise tax. The calculation for this tax can be complicated and it is not based on your profits per se. This is one I suggest leaving to your CPA to calculate as

Payroll Taxes

If you hire employees or pay yourself through your business, you will owe payroll taxes. There are quite a few items here, but any good payroll provider (like Gusto) will streamline this process and make it easy for you to stay compliant. I recommend using a service to handle payroll to most businesses because of the intricacies of calculating payroll taxes for each employee and the frequency with which deposits have to be made with the government. Payroll taxes can be “employer paid” and/or “employee paid”. The first is a tax that is only paid by the employer, and which does not reduce the employee’s net pay. The second is a tax that is also paid by the employee, which gets deducted from their take-home pay.

• State Unemployment Tax Act (SUTA) - these are taxes collected by the state that fund unemployment insurance for workers in that state. This is an employer paid tax that goes directly to your state’s funds.
• Federal Unemployment Tax Act (FUTA) - this is the same as SUTA, but is paid to the federal government. They allocated these funds across different states’ unemployment funds as they see fit. If they determine a certain state needs more assistance because they are taking in enough SUTA, they can give that state more money to fund its unemployment burden.
• Federal Insurance Contributions Act (FICA) - this is made up of two different taxes: medicare taxes and social security taxes. Both of these programs are meant to provide support for retired (or nearly retired) Americans. These taxes are paid by both employee and employer equally.
• Self-employment tax - if you are self-employed, there is no separation of employee versus employer FICA taxes. Instead this tax rate is a combination of both tax rates and is used to capture the full amount you are expected to pay.

Sales & Use Tax

Certain sales of goods or services required you to collect and remit sales tax to the government. This is why you pay sales tax as a consumer when you buy things at the store. The rate your business charges is set by your state and whether or not it is an origin or destination based sales tax state.  Each state has its own sales tax rules and It is not always a simple matter to determine if you should be collecting sales tax and at what rate on the goods and services you sell. This is one area where a tax professional can more than pay for themselves.

Real and Personal Property Tax

These taxes are charged based on the taxable value of all the property your business owns. Just like a person who owns a home has to pay property taxes, a business pays taxes on any real estate it owns. The term “personal” here is misleading, but refers to any other assets the business owns (equipment, furniture, inventory, etc.) that also gets taxed. The rates vary based on where your business is located so make sure to check with your CPA.

Tax matters can be confusing and there are many more to consider than what I’ve listed here.

For answers to questions you have about this or related topics, schedule your free consultation today.