Starting or taking over an existing business can be exciting and overwhelming at the same time. There are many things to consider and plan for like branding, marketing, hiring employees, and management. When it comes to figuring out the different business taxes that apply to your company, it can seem like the list of things to learn just gets longer and longer!
Here is a list of some common business taxes:
At a federal and state level, most businesses are subject to a tax on the income they make. Different factors will determine a business' exact effective tax rate, but they can expect to make a payment to state and federal governments when filing a tax return for a profitable year.
Revenue (sales) increases income and expenses reduce income. The less income made after considering the expenses by the business, the less income tax will be due. This is a perfect example of why it's absolutely essential to have proper accounting in place to keep track of income and expenses. Any errors, however unintentional, puts your business at risk for audit and possible penalties by the IRS and state authorities.
When a business pays a person for work as an employee, the business is responsible for sending not only what it was required to withhold from their paychecks, but also the business' own portion of payroll taxes. All businesses pay federal payroll taxes such as FICA and Medicare, and some businesses will have to pay payroll taxes to the states in which they have employees, depending on the state laws.
To avoid penalties and risk of audit by the IRS, it's important to keep your payroll process and records accurate and up-to-date.
Many states require businesses to pay sales and use tax, or collect and send them on behalf of their customers.
- A 'sales tax' is a tax on the transaction (or 'sale') of goods and/or services for money.
- Laws about what is taxable and what is not vary from state to state. For example: in California, labor is not taxable, while labor is taxable in Washington state.
- Generally, the business collects the tax from the customer and sends it with a report of all other sales and taxes collected to the department responsible for revenue collection within their state government.
- The taxable rate varies from county to county, and in some cases such as Washington state, from city to city within a state.
- A 'use tax' is a tax paid on the use of goods or certain services when sales tax has not been paid. For instance, in Washington goods are subject to either a sales tax or use tax but not both.
- Often used to pay tax on goods purchased from a state with no sales tax or someone who is not authorized to collect sales tax, such as a used good vendor from Craigslist.
- As with sales tax the taxable rate varies from county to county and, sometimes, from city to city.
One can imagine why it's imperative as a business owner or manager that a company keeps very detailed records of their purchases, not only for federal tax purposes, but at a state level as well.
A business is also responsible for paying taxes on their property; whether real property or personal/tangible property.
- State: at a state level, businesses are most often responsible for property tax in the form of vehicle registration. This applies to all business and commercial vehicles operated and housed in any given state.
- County/Municipal: at a county or city (municipal) level, businesses are sometimes required to pay a tax on personal or tangible property such as furniture, computers, equipment, etc. In almost all situations, if a business owns real property, it will be responsible for paying property tax on it. The real property tax will most often be assessed by and paid to the county.
Although they are assessed less frequently than sales or payroll tax, it is just as important to keep thorough records for reasons relating to property taxes as well.