Business taxes vary depending on how your business is structured. There are five types of business taxes.
- Employment tax
- Estimated tax
- Excise tax
- Income tax
- Self-employment tax
Not all types of taxes will apply to every business. For example, only employers must pay employment tax, but most businesses must pay estimated tax payments. Read below to learn more about each type of tax and deductions you can take to reduce tax liability.
Withholding employment tax
Businesses are responsible for withholding payroll taxes for their employees. This payroll tax includes federal taxes, Social Security tax, and Medicare tax. Employers must withhold an additional Medicare tax for employees who make over a certain threshold amount. The threshold is based on filing status.
Employers must match the Social Security and Medicare tax withheld from each employee’s paycheck. However, the employer is not responsible for matching additional Medicare tax. Both the employer and employee tax portions must be deposited on a bi-weekly or monthly basis. Use Internal Revenue Service (IRS) Publication 15 to determine which schedule to use when paying employment tax. Agricultural businesses should use Publication 51. Late deposits may be subject to a 15 percent failure-to-deposit penalty.
Paying estimated tax
Not every business has to pay estimated tax, but most do. The cutoff for determining whether you must make estimated tax payments depends on your business structure. Corporations must make quarterly payments if they expect to owe more than $500 in taxes for the year. For individuals, the cutoff amount is higher. Self-employed taxpayers, sole proprietorships, S corporations, and partnerships must pay estimated tax if they will owe $1,000 or more in taxes.
Estimated tax exemption
To avoid paying estimated tax, you must meet all three of the following criteria
- Your tax liability for the previous year was zero or you did not have to file a tax return
- You were a citizen of or resided in the U.S. for the entire year
- Your previous tax year covered a 12-month period
Figuring estimated tax
First, estimate your Adjusted Gross Income (AGI), tax liability, deductions, and credits for the upcoming year. This will help you determine the amount of estimated tax you owe. It may be helpful to use your tax return from the previous year as a starting point.
Use Form 1120-W to figure corporate income tax payments. Individuals, including the self-employed, S corporation shareholders, partnerships, and sole proprietorships will use Form 1040-ES. If your business income is more or less than predicted, you may be able to adjust your payment. You must file a new form with current information with the adjusted payment.
Determining excise tax liability
Excise taxes are levied on specific products, services, equipment, and types of business. Excise taxes fall into several broad categories including, but not limited to
- Communications and Air Transportation taxes
- Environmental taxes
- Fuel taxes
- Retail taxes on the first sale of heavy duty trucks and equipment
- Manufacturers taxes
Gambling establishments such as racetracks or casinos must also pay excise taxes on gambling income.
Filing income taxes
Nearly all businesses must file an income tax return. The only exception to this rule is a partnership. Because each partner reports business income on their personal taxes, they must file an information return instead. Your business structure will determine which tax forms you use.
In most cases, you will pay federal income tax as you earn income. Most businesses use estimated tax payments to stay current. Businesses that do not have to pay estimated tax may take care of their tax bill when they file their return.
Paying self-employment taxes
When Social Security and Medicare taxes are withheld from an employee’s paycheck, their employer must match the amount. Self-employed individuals are responsible for both the employer and employee portion of these taxes.
You must pay self-employment tax if your self-employment income exceeds $400. Individuals who are part of the following categories are self-employed
Avoiding insurance penalties
Large employers who fail to comply with Affordable Care Act (ACA) insurance mandates are subject to penalties. According to the IRS definition, a large employer is one that had 50 or more full-time or full-time equivalent employees the previous year. At $2,000 per year per person over the 50-person limit, the penalty can add up quickly. Some exceptions apply; ask an Expert to determine whether your business is subject to ACA regulations.
Establishing business deductions
Section 162 of the U.S. tax code allows businesses to deduct “ordinary and necessary” expenses from their gross income. However, the phrase is not always clearly defined. Some IRS forms and publications list clear guidelines for specific deductions. For example, Publication 463 clearly defines travel expenses.
In the absence of definitive guidelines, common sense prevails. For example, the owner of a diner could deduct the cost of napkins as a legitimate business expense. You may also use tax court rulings as a basis for determining what is deductible.
Taking common business deductions
Several business expenses are legitimate deductions. Here are a few of them.
There are two ways to deduct the cost of using a vehicle for business. First, you can track and deduct actual expenses. The alternative is deducting standard mileage, plus tolls and parking fees related to business.
The first method is more profitable if the vehicle is new since it allows you to deduct depreciation costs. If you use standard mileage, you must take the deduction the first year you use the vehicle for business. You cannot double dip by claiming depreciation and standard mileage.
Advertising and other overhead costs are not deductible until your business is up and running. However, you may include these expenses in your startup costs. The deduction is limited to the first $5,000 the first year you are in business. Any remaining costs may be equally divided and deducted over a 15-year period.
You can deduct the cost of sold goods if a customer does not pay for them. However, service providers are not allowed to deduct the price of unpaid services.
If you take a client to lunch, concert or sporting event, you may be able to deduct half of the expense. However, you must provide proof that you discussed business before, during or after the event. Making notes on the receipt is a good way to do this. Note the contact’s name, company affiliation, and the proposal you discussed.
Several expenses associated with business travel are deductible. These include, but are not limited to
- Dry cleaning
- Cab fare or mileage, if you use your vehicle
- Meals and lodging
If you bring your family along on a business vacation, some of the costs are still deductible. However, you may only deduct your expenses.
You may be able to deduct the complete cost of new business equipment or assets. Under Section 179 of the tax code, you may deduct expenses up to $500,000. However, the equipment must be bought and placed in service that year. The deduction begins to phase out once you reach $2 million in business investments.
Certain assets do not qualify for the deduction. You cannot deduct real estate, inventory intended for resale or purchases made from a close relative.
Business tax returns can vary widely from business to business. Ask an Expert for customized answers to your business tax questions.