Launching a Company? Understand the Taxes That Come With It!
Starting a business is exciting, but taxes quickly become part of the picture.
If you’re opening a business, you’ll encounter multiple types of taxes. Below is a straightforward overview of the most common ones, followed by deductions and credits that can help lower what you owe.
Income tax
Most businesses must file a federal income tax return each year. If your business is structured as a partnership, the partnership files an informational return, and profits or losses pass through to the partners, who report them on their personal tax returns.
Self-employment tax
Sole proprietors and partners are responsible for self-employment tax. This tax covers contributions to Social Security and Medicare that would otherwise be split between an employer and employee.
Employment taxes
If you hire employees, you must withhold and pay employment taxes. These include Social Security and Medicare taxes, as well as federal unemployment tax, which is paid entirely by the employer.
Excise taxes
Certain businesses are subject to excise taxes based on what they produce or sell. These taxes apply at both the federal and state levels and often affect businesses that manufacture, import or sell specific products.
Sales tax
Sales tax is handled at the state and local level, not federally. If your business sells taxable goods or services, you’re required to collect sales tax from customers and send it to the appropriate tax authority. This typically starts with registering with your state’s tax agency.
State and local income taxes
Depending on where you live and operate, you may owe state or local income taxes. Sole proprietors, partners and S corporation shareholders often pay these personally. Since rules vary by location, it’s important to review your state’s requirements.
Property taxes
Businesses that own real estate, such as offices, land or warehouses, may owe property taxes at the state or local level. Some jurisdictions also tax tangible business property like machinery, furniture or inventory.
Franchise taxes
Certain states impose franchise taxes simply for doing business there. These taxes vary by state and business type and aren’t necessarily tied to income.
Business license fees
Many industries require licenses or permits at the state or federal level. Fields such as construction, food service, retail, agriculture and plumbing commonly require licenses that come with fees and renewal requirements.
Estimated taxes
Estimated taxes are advance payments made throughout the year, usually on a quarterly basis. If you don’t pay enough as you go, you could face penalties when you file your return.
Employer identification number
An employer identification number (EIN) isn’t a tax, but it’s essential. Issued by the IRS at no cost, it serves as your business’s federal tax ID. Some states also issue separate business identification numbers.
Let’s talk about what you can deduct
Knowing what you owe is only half the equation. Deductions and credits can significantly reduce your tax bill.
Business expenses
Most ordinary and necessary expenses related to running your business are deductible. These often include payroll, rent, utilities, mileage, travel, advertising, office supplies, equipment, and phone and internet costs, along with certain state and local taxes.
Depreciation
Large purchases aren’t always deducted all at once. Depreciation allows you to spread the cost of items like equipment or property over their useful life.
Home office deductions
If you’re self-employed and use part of your home exclusively and regularly for business, you may qualify for a home office deduction. This is typically calculated based on square footage and can include a portion of utilities, insurance, repairs, mortgage interest and depreciation.
And tax credits, real savings on your tax bill
Credits reduce your taxes dollar for dollar, making them especially valuable. Common business-related credits include:
- The Work Opportunity Tax Credit for hiring individuals from certain target groups, such as veterans
- The Childcare Credit to offset costs of providing employee care benefits
- The Qualified Small Business Payroll Tax Credit for eligible research-related payroll expenses
Additional credits may be available, and the IRS maintains an updated list on its website.
Stay organized, meet deadlines, and seek expert advice
Tax compliance requires good recordkeeping and planning. Maintain detailed records of income and expenses, and keep track of filing deadlines to avoid penalties. The IRS tax calendar can help you stay on schedule.
Taxes are a constant part of running a business. Working with a qualified tax professional or certified public accountant can help ensure you comply with the rules and take advantage of every benefit available to you. Getting it right from the start can save time, money and stress down the road.
