Deciding to start a small business can be a daunting task. Many new business owners don’t know what to expect, which can cause some anxiety or fear. Business owners have to keep up with records and make sure their taxes are recorded correctly. For these and other reasons, lots of new small business owners find themselves fretting over their taxes.
Understandable. But not inevitable! We are here to help ease any anxiety or fear when it comes to doing your taxes as a business owner. And we’re here to tell you that there are a ton of ways to take the stress out of the season, from business
What Factors Determine Your Taxes?
There are two main factors that determine how much tax, the legal entity you choose to create your business under, and the state you operate your business in.
When you set up your business there are four main legal entities you can choose from. Your choice will impact how you pay your taxes and what tax rate you will have to pay.
If you choose to run your business as a sole proprietorship your business taxes will not be separate from your personal taxes. The internal revenue service (“IRS”) will not recognize your business as a separate legal entity for tax purposes. There are a few tax deductions you can take advantage of as a sole proprietorship, however, since your business is not legally separate from you as an individual it can be difficult to determine if you qualify for certain tax deductions. For this reason, it is not advised that you continue your business as a sole proprietorship long term. You could be losing out on a lot of savings each year with your taxes.
Similar to the sole proprietorship, a partnership’s income is not taxed as business income, rather each partner will report their share of the business’s income as their own personal tax returns. If you have more than one member it is usually recommended by professionals that you consider registering as an LLC or incorporating your business.
The LLC is often the most recommended for small businesses. It is the perfect mixture of a partnership and a corporation. You can choose how you want to be taxed. You can either use the LLC as a
Corporations often get the short end of the stick when it comes to taxes as an individual with a business. If you own a corporation, you have to pay a corporate tax on the business income as well as pay tax on your income you were paid by the corporation. If your business is still relatively small most of the time it is better to stick with the LLC option rather than incorporate your business. If you are not sure which would be best for your situation, consider reaching out to a business or tax professional before making the leap to incorporation.
The second factor that will have a big impact on your taxes is your state’s income tax rates and business tax laws. There are some states that are very
The treatment of taxes and businesses varies greatly from state to state. For example, Nevada does not have an income tax or corporate tax. Additionally, New Hampshire has no sales tax. If you are wanting to open a storefront that sells products you may want to consider New Hampshire because you won’t have to worry about paying sales tax on anything.
On the other hand, there are some states that you may want to avoid doing business in if you can. California and New York have some of the highest tax rates in the United States, which will eat into a big portion of your profits. New Jersey has the highest property tax in the United States, making it a place to avoid if you are going to have a physical location. New Jersey also has the second highest corporate income tax, so you may want to reconsider it if you are thinking of incorporating your business.
Business Taxes You Should be Aware Of
As a business owner, your taxes will look different than the average person who is an employee working for someone else. One benefit of being an employee is you can go almost the entire year without worrying about your taxes. You get your
As a business owner, you still have to pay medicare and social security tax on your income. For federal taxes, the
If you have employees you will have to make sure to withhold federal income tax, Medicare, and social security properly from your employees’ paychecks.
Depending on your business you may owe an excise tax. This is a federal government tax on businesses that manufacture or sell certain products. It may also apply if you use certain equipment, facilities, or products.
Sales tax is a state tax that any business may have to pay if they sell goods. Some states still like to tax you if you perform services. Make sure you register your business to help make sure you are paying taxes properly and look up your tax rate so you know how much to set aside in order to pay your taxes.
Property tax is another state tax that you may or may not have to pay depending on whether you own a building that you do business out of and which state you live in. Property taxes vary widely across the United States, if you are considering purchasing a business building, you may want to check the state’s property tax.
Benefits of Paying Tax as a Business
While taxes seem like a pain (as they normally are), there are some benefits of being a business owner rather than an employee. This comes in the form of expenses and
Here is a very simple example to show you how being a business owner can save you money.
Unlike an employee, businesses get the benefit of deducting their expenses prior to being taxed. For example, say an employee makes $100 a day and is taxed at a 10% rate and they want to go out to eat with some
On the other hand, say you are the business owner. You make $100 that day and are taxed at a 10% rate. You decide to go to lunch with some of your employees and you discuss work. You spend $15. Well that $15 is an expense! So you would take your $100 write off the $15 and you’re left with $85 and then taxes hit. So rather than being taxed $10 you are only taxed $8.50. So you are left with $76.5.
While this example is a simplified version, it does show the power of expenses and writing those off. These expenses tend to be higher than just $15 and tax rates don’t tend to be as high as 10% but we wanted to keep the math simple.
These tips are to help you start thinking of how to handle your taxes as a business, and to get oriented with some basic tips. Always seek tax advice from a tax professional if you have specific questions about your business’s taxes. At any rate, we wish you the best of your business venture, and encourage you to have no fear about getting those taxes done!
To help you out with taxes, Ecwid can calculate taxes automatically for merchants in the USA, the EU, Canada, Australia, and New Zealand.
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