In 2022, the United States government collected nearly 5 trillion dollars in taxes. While a lot of that money came from individuals, a big chunk was paid by the various businesses that operate in the country.
If you own your own business, you might be confused about how to go about your taxes. We can help. Let’s go through the basics of what you need to understand about business taxes.
1. Business Structure and Taxation
Your business’s structure affects how your business is taxed. Each structure has different tax implications, including how income is reported and the tax rates that apply.
A sole proprietorship is the most basic structure type. In this structure, the business and the business’s owner are considered a single entity for tax purposes. Many small businesses are sole proprietorships.
The owner reports the income from their business and any expenses on their personal tax return (Form 1040) using Schedule C. The business’s profits are subject to self-employment taxes, which include Social Security and Medicare taxes.
In a partnership, multiple people share business ownership and management. Partnerships themselves do not pay income taxes. Instead, the profits and losses of the partnership foto the partners, who report their income share of the income on their own tax returns. Each partner pays taxes on their allocated share of the partnership’s income.
There are also LLCs, which combine elements of partnerships and corporations. By default, a single-member LLC is taxed in the same way as a sole proprietorship would be.
An LLC with more than one member does taxes as a partnership. However, an LLC can also make the decision to be taxed as a corporation.
2. Employer Identification Number
An Employer Identification Number (EIN) is a number given to your business by the IRS. To obtain an EIN, you must apply with the IRS. The application process is typically straightforward. The IRS provides Form SS-4, which asks for information like your business’s legal name, address, and type of entity.
3. Business Tax Returns
Most U.S. businesses need to file a return every tax period. The return type you file will depend on your business structure. For example, sole proprietors report business income and expenses on Schedule C (Form 1040), while corporations file Form 1120.
Business tax returns require reporting both income and deductions. Income can include sales revenue, rental income, interest, and other sources related to your business activities.
Deductions may include business expenses, cost of goods sold, depreciation, and other eligible deductions. Ensure you have accurate and well-organized records to support your tax return.
4. Deductible Business Expenses
Businesses can deduct ordinary and necessary expenses incurred to operate the business. Common examples of business deductions include:
- Salaries and wages paid to employees
- Rent or lease payments for business premises
- Business insurance premiums
- Utilities directly related to your business
- Advertising and marketing expenses
- Travel expenses for business purposes
- Office supplies and equipment
- Professional services
- Costs of goods sold
- Business-related vehicle expenses
If you’re not sure which of your expenses count, consult with a business accountant.
Depreciation allows you to deduct asset costs over their useful life. The IRS provides guidelines on how to calculate and claim depreciation deductions, which can help reduce taxable income.
Depreciation applies to tangible assets that have a determinable useful life, such as buildings, machinery, vehicles, furniture, and equipment. Land, intangible assets, and assets with a useful life of one year or less are generally not depreciable.
There are different methods to calculate depreciation. The two primary methods used for tax purposes are straight-line depreciation and accelerated depreciation.
6. Self-Employment Taxes
If you operate a sole proprietorship or are self-employed, you’ll need to pay self-employment taxes. Self-employment taxes include Social Security and Medicare taxes.
These taxes are on top of income taxes and are typically calculated on your net self-employment income.
7. Employment Taxes
If you employ people at your business, you must withhold and pay employment taxes, including federal income tax, Social Security, and Medicare taxes, from their wages.
Employers need to withhold Additional Medicare Tax from employees’ wages if their income exceeds a certain threshold. You’ll also need to pay federal unemployment tax based on the wages paid to employees. This tax funds unemployment benefits for eligible workers.
8. State and Local Taxes
In addition to federal taxes, businesses may have to pay state and local taxes. These can include income taxes, sales taxes, property taxes, and other specific taxes imposed by local jurisdictions.
If your business does work in more than one state, you may have tax obligations in each state where you have a substantial presence. This is known as nexus. Nexus can be established through physical presence or economic activity. It’s important to understand the nexus rules in each state and comply with their tax requirements.
9. Record-Keeping and Documentation
Maintaining accurate and organized records is essential for business taxes. Keep track of income, expenses, receipts, invoices, and any other relevant documents.
Good record-keeping ensures that you can substantiate deductions, comply with tax laws, and respond to any potential audits or inquiries.
10. Tax Professionals and Software
Consider consulting with a tax professional or using tax software to navigate the complexities of business taxes. They can provide guidance, ensure compliance, and help optimize tax strategies for your business.
If you need help, contact this accounting company for all the tax advice and accounting tips you need.
Business Taxes: Now You Know
Clearly, there’s a lot that goes into business taxes. Hopefully, you now know enough to avoid getting into any trouble.
Are you searching for more financial and tax advice? We’ve got you covered. Scroll through some of our other finance-related articles for all the help you need.