Types of Small Business Taxes


As a small business owner, understanding taxes is crucial for the financial health and proper legal standing of your company. In this article, we’re defining the most common business taxes, as they are the foundation to the U.S. tax system.

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Income Tax

First up, the income tax. It is levied on the profits generated by your business. You’re not taxed on your revenue but on the net profit, which is the amount left after costs have been subtracted.

A key factor here is to differentiate between your personal and business income. Often, small business owners intertwine personal and business finances, which greatly complicates tax matters. Separating the two ensures accurate reporting and tax compliance.

Also, choosing the correct filing option (sole proprietorship, partnership, LLC or corporation) affects how your income is reported. For example, sole proprietors report business income on their personal tax returns, while corporations make separate tax filings.

Self-Employment Tax

If you’re self-employed, you’re responsible for both the employer and employee portions of Social Security and Medicare taxes. This is known as self-employment tax.

Calculating self-employment taxes is important for budgeting and planning purposes for your business. This tax is based on your net earnings. Also note, self-employed individuals have specific deductions and credits available to them, such as the Qualified Business Income (QBI) deduction and the home office deduction.

Estimated Quarterly Taxes

Most small business owners will need to pay estimated tax payments each quarter. In this payment, a small business’s income tax, both federal and state, plus the self-employment tax are included. The IRS expects businesses to pay as the year progresses (instead of one large payment). Plus, it protects you as a business owner from owing one large amount due at once.

Payroll Taxes

These taxes apply to your business if you have employees. Social Security, Medicare and Unemployment are examples of payroll taxes. You are responsible for withholding payroll taxes from employees’ paychecks and contributing their portions.

State and Local Taxes

Of course, each state, county or parish and municipality have their own taxes. For example, most states have an income tax and an unemployment tax. And counties, parishes and cities usually have property taxes, which may apply to your business.

It’s important to study your local tax codes to avoid penalties or surprising payments. (As an agency with deep roots in Michigan, we love helping small businesses in our state understand the taxes they are expected to pay.)

Morgan & Associates are Tax Experts

This article is an overview of common taxes and tax terms. Yes, they can be complicated. But, with basic understanding and the support of a knowledgeable accounting firm like Morgan & Associates, your small business can thrive. We encourage you to reach out to us with questions about federal or state taxes.

Complete the contact form below to start a conversation with one of our tax professionals.

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