What Business Taxes Do I Pay?

I started a business a few months ago, but I don’t know anything about taxes. What am I supposed to do?

Why would I owe franchise tax? I don’t own a franchise.

I’ve been collecting sales tax all year. We need to figure that out when you do my taxes in April.

Don’t know what’s wrong with these statements? This blog is for you. Not knowing what to pay can cause you to pay late and be charged penalties and interest.

What Business Taxes Do I Pay?

When you think of ‘doing your taxes’ you are thinking of federal income tax: refunds, tax credits, deductions, and all that. But that is just the beginning. The states tax you, too. And your county. Maybe even your city or town.

What’s a new business owner to do?

Basic Kinds of Business Taxes

Federal Tax (IRS)

The federal government charges income tax. Income tax is on the profit from your business. Most small businesses pay their business income tax on their personal tax return, either on Schedule C or Schedule K1. Your business profit is added to your other income and you are taxed on all your income in one pile. You may also owe self-employment tax. This is calculated on your personal tax return.

State Income Tax

This is usually calculated at the same time as your federal income tax. All but 7 states charge state income tax. More on Income Tax here. 

State Sales Tax

Every state’s sales tax is different. Some charge sales tax on services, some on groceries, some on clothing. Some states do not tax any of those things. Every state is different. Sales tax varies greatly from state to state, but here is the one common thread: When you start a business, you are an agent for the state and have to have a permit.  You collect sales tax from your customer. You are collecting for the state.  Then you send the state their money. If you follow all the rules, they pay you a little for doing their work. Sales tax is not extra money for you. You are collecting the state’s money. All but 4 states charge sales tax.

Local Sales Tax

In states that collect sales tax, it is also common for some destination cities to collect an additional sales tax on hotels, alcohol sales, or restaurant sales to cover the cost of advertising in the city and providing trail systems, bike paths, and public art.

State Franchise Tax

Franchise tax is a tax for the right for your entity to exist and conduct business in your state. If you have an LLC or corporation, it is possible that you need to pay franchise tax. Some states have a very low minimum tax. (Missouri is $25.) Some have a very high minimum. (California is $800.) Even if your LLC or corporation did not conduct any business, you still owe franchise tax. The tax is for your right to exist. 20 states charge franchise tax.

State or County Property Tax

Some states charge property tax on your business assets. Assets are the things you own that help you make money. Office furniture, computers, tools, and equipment are examples of business assets. Your state may tax these things. Generally, you have to ‘assess’ or give a list of your business property to the assessor, then they send you a bill for the tax. 25 states charge property tax on business assets.

Payroll Taxes

Payroll taxes are charged by the Federal government (IRS), the state where you operate your business, and the state where your employees work. You have to withhold what the employee will owe for their state and federal income tax, and their part of Social Security and Medicare taxes. You have to match their contributions to Social Security and Medicare. Then you have to pay into federal and state unemployment on top of that. Payroll taxes are complex and you should use an accountant or software to keep track. Do not DIY payroll. All states require businesses to pay unemployment.

Other Business Taxes:  Licenses and Permits

These depend on your situation. Some cities require all home businesses to register, even if you are just a blogger. Other things like HVAC and plumbing require state licenses. Most places have zoning regulations that regulate what businesses can do in residential areas. Most places have occupancy permits that require you to pass fire and safety inspections. Serving food requires a health permit and serving alcohol often requires a neighborhood meeting for approval. Always check with your city to be sure you have all required licenses and permits to operate.

Business Taxes Summary

If you are operating a business, you need to know what taxes to pay, when and how to pay them, and what licenses and permits are required. You are held to a higher standard. If you start a business, you are expected to know these things. Uncle Sam will get his slice, and if you don’t know what you are doing, he will take it with additional penalties and interest.
Read the other blogs in this series to learn more about all these business taxes.

Business Income Tax