Business Law

Tax Issues and Your Small Business

When beginning a business, you must decide what form of business entity to establish. Your form of business determines the income tax return form you have to file. The most common forms of business are the sole proprietorship, partnership, corporation, S-corporation, and a limited liability company (LLC).

Types of Business Taxes

The form of business you operate determines what taxes you must pay and how you pay them.

There are four general types of business taxes:

  • Income Tax
  • Self-Employment Tax
  • Employment Taxes
  • Excise Tax

Income Tax

The form you use to file your income tax depends on how your business is organized and structured. All businesses except partnerships must file an annual income tax return. Partnerships file an information return.

The federal income tax is a pay-as-you-go tax, thus you must pay the tax as you earn or receive income during the year. If you do not pay your tax or enough tax through withholding, then you might have to make estimated tax payments.

Estimated tax is the method that is used to pay tax on income not subject to withholding. Income not subject to withholding includes: income from self-employment, interest, dividends, rent, gains from the sale of assets, prizes and awards.

Sole proprietors, partners or S-corporation shareholders, generally have to make estimated tax payments if they expect when they file their tax return they will owe tax of $1,000 or more. If you own a corporation, generally you must to make estimated tax payments for your corporation if you expect to owe tax of $500 or more when you file its return.

Self-Employment Tax

Self-employment tax ("SE" tax) is a Social Security and Medicare tax primarily for individuals who work for themselves. Your payments of SE tax contribute to your coverage under the Social Security system. Social Security coverage provides you with retirement benefits, disability benefits, survivor benefits and hospital insurance (Medicare) benefits.

Generally, you must pay SE tax and file Schedule SE (Form 1040) if either of the following applies:

  • If your net earnings from self-employment were $400 or more
  • If you work for a church or a qualified church-controlled organization (other than as a minister or member of a religious order) that elected an exemption from Social Security and Medicare taxes, you are subject to SE tax if you receive $108.28 or more in wages from the church or organization

Employment Taxes

When you have employees, you as the employer have certain employment tax responsibilities that you must pay and forms you must file. Employment taxes include the following:

Excise Tax

Excise tax is a tax that is imposed on the manufacture and distribution of certain non-essential consumer goods. Examples of excise taxes include environmental taxes, communications taxes and fuel taxes.

You may have to pay excise taxes if you do any of the following:

  • Manufacture or sell certain products
  • Operate certain kinds of businesses
  • Use various kinds of equipment, facilities, or products
  • Receive payment for certain services

Tax Advantages for Corporations

Corporations enjoy certain tax advantages. They are entitled to take certain tax deductions not available to unincorporated businesses or S-corporations, such as deductions for health insurance premiums paid on behalf of an owner-employee; savings on self-employment taxes, as corporate income is not subject to Social Security, Workers Compensation and Medicare taxes; and other expenses such as life insurance.

Question For Your Attorney

  • How do I figure out how much estimated tax I am supposed to pay?
  • How do I find out if I need to pay excise tax and how do I find out how much excise tax I owe?
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