It’s certainly not the most exciting part of running your very own small business, but understanding and fulfilling your business tax obligations must be a priority if you want to keep your doors open. Failing to properly file your federal and state business taxes could mean losing your business or even facing criminal charges. Yikes!
Read on to make sure you understand the tax obligations of your business and will be able to meet them when they come due.
EIN
The first step in being able to pay the proper business taxes is to apply for an employer identification number (EIN)—also called a federal tax identification number or business identification number. This nine-digit number is like a social security number for your business. It helps the IRS keep track of your business and its employees for tax purposes. But that’s not all it does.
An EIN is used to open a business bank account, apply for a business credit card or loan, and work with suppliers without having to use your personal social security number. It’s important to keep your business and personal finances separate for many reasons, including protection against fraud and identity theft and keeping business loans off of your personal credit report.
Not all types of businesses need an EIN for tax purposes (although you might want it for the reasons listed above), including sole proprietorships with no employees and simple member LLCs with no employees. If your business falls into either category, you can use your social security number when filing your income taxes.
The application for an EIN from the IRS is easy and free. You can apply online via the IRS website or by mail, fax, or phone.
Federal business taxes
The type of small business you have determines which taxes you’ll need to pay, how to file, what forms to use, and when payments are due. The following taxes are a good sampling of the most common types of business taxes. Visit the IRS website to learn more.
Income tax
All types of businesses must file an annual income tax return. The amount owed is based on revenue made throughout the year. The exact tax form you should use will depend on the structure of your company (e.g. sole proprietorship, partnership, corporation, S-corporation, LLC, etc.). Federal income taxes are “pay-as-you-go taxes,” meaning instead of paying one lump sum at the end of the year, you’ll need to make estimated tax payments each quarter (more on that below).
Self-employment tax
Small business owners pay a self-employment tax, which covers contributions to Social Security and Medicare taxes similar to the taxes withheld from the paychecks of most wage-earning employees. This is also a pay-as-you-go tax.
Estimated tax
As previously mentioned, federal income and self-employment taxes are pay-as-you-go taxes that must be filed and paid quarterly. The IRS understands that accounts receivable and invoices may not all be paid by the end of each quarter, so you file and pay these taxes estimating what you owe based on your estimated revenue.
Employment tax
For those small businesses with employees, you will have employment tax obligations, including social security and Medicare taxes, federal income tax withholdings, and federal unemployment tax.
Excise tax
Excise taxes are paid by businesses that sell certain products, use certain types of equipment, and rely on heavy fuel usage. Many businesses who incur this type of tax pay for it by including the cost in product or service prices.
State taxes
In addition to federal taxes, each state has its own income and employment taxes that businesses must pay. There may also be additional fiscal requirements, like mandated workers’ compensation and unemployment insurance. Be sure to learn about the taxes and requirements in your state before your business’s first tax season!
Understanding and correctly paying the appropriate business taxes on time means your small business will avoid overpaying on estimated taxes, will keep more money on hand to spend on expenses and invest for growth, and will avoid underpaying the government and be forced to pay a large sum during tax season.
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