Starting a Business? Know Your Taxes!
Your business is probably subject to a lot of taxes.
If you’re launching a business, expect taxes — all kinds. Here’s a quick breakdown of the ones you might be on the hook for, followed by some credits and deductions that could help.
Income tax
Unless you’re operating as a partnership, your business will need to file a federal income tax return every year. Partnerships file what’s called an information return — the income flows through to the individual partners, who then report it on their personal returns.
Self-employment tax
If you’re a sole proprietor or a partner in a partnership, you’ll pay self-employment tax. This covers your share of Social Security and Medicare.
Employment taxes
If you have employees, you’re responsible for employment taxes. These include Social Security and Medicare — plus federal unemployment tax, which you pay in full as the employer.
Excise taxes
Depending on your industry and activity, you may need to pay excise taxes. These are imposed at the federal and state levels and usually apply if you manufacture, sell or import certain goods.
Sales tax
Sales tax isn’t federal — it’s handled by states, counties and cities. If you sell taxable goods or services, you’re required to collect sales tax and remit it to the proper authority. First step: Register with your state’s taxing agency.
State and local income taxes
Sole proprietors, partners and S corporation shareholders may owe state or local income taxes, depending on where they live and operate. These rules vary widely, so check your state’s requirements.
Property taxes
If your business owns buildings, land or other real property, you may owe property taxes at the state and/or local levels. In some places, you’ll also pay tax on tangible personal property, such as equipment, inventory or office furnishings.
Franchise taxes
Some states charge franchise taxes simply for the privilege of doing business within their borders. This applies to different types of businesses, depending on the state.
Business license fees
Many activities require licenses at the state (and sometimes federal) level. Common examples include the construction, food service, retail, farming, plumbing and vending industries; they often come with licensing fees that need to be paid up front and renewed periodically.
Estimated taxes
Estimated taxes isn’t its own category — it’s a method of paying taxes throughout the year. These payments are due quarterly, and if you don’t pay enough, you may face penalties for underpayment.
Employer identification number
This isn’t a tax either, but you’ll need one. Your EIN is a federal tax ID issued by the IRS; it’s free and available online. Some states also issue their own business ID numbers, so check whether that applies to you.
Let's talk about what you can deduct
Now that you know what you may owe, here’s what might help reduce your tax burden through deductions and credits:
Business expenses
Most ordinary and necessary business expenses are deductible. This includes things such as wages, rent, utilities, mileage, travel, office supplies, equipment, marketing, and internet and phone services — and often your state and local tax payments too.
Depreciation
Some deductions aren’t immediate — depreciation spreads the cost of larger purchases (such as equipment or property) over several years.
Home office deductions
If you’re a sole proprietor using part of your home exclusively and regularly for business, you may qualify for a home office deduction. This is based on square footage — and you can deduct a portion of the mortgage interest, insurance, utilities, repairs and depreciation tied to that space.
And tax credits — actual dollar-for-dollar savings
Unlike deductions, which reduce taxable income, credits directly reduce what you owe. Here are a few to know:
- The Work Opportunity Tax Credit for hiring certain qualified individuals, such as veterans or recipients of public assistance
- The Childcare Credit to help with the cost of providing insurance benefits to employees
- The Qualified Small Business Payroll Tax Credit for eligible research-related expenses
There are other credits, too; the IRS maintains an updated list on its site.
Keep records, know your deadlines and get professional help
Tax filing requires documentation and planning. Keeping detailed records of your income and expenses — and staying on top of filing deadlines — will help you stay in good standing. The IRS tax calendar is a good resource for staying organized.
Taxes are a permanent part of your business life. Work with a tax professional or certified public accountant who can guide you based on your business type, structure and location. It’s worth it to get it right.
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