Owning a small business has its perks — from being your own boss and doing something that you love, to making profits. Yet when tax time rolls around, business ownership can be a major headache. Knowing what taxes you have to pay and when to send them to the IRS is crucial, because if you make any type of mistake in reporting your taxes or paying them, it can lead to serious ramifications.
Corporate Returns vs. Personal Returns
The first thing you have to do is determine the type of business you are operating. Is it a sole proprietorship, LLC, partnership, C corporation, or S corporation? Your business structure will allow you to understand whether you report profits on corporate returns, personal returns, or both. It also narrows down which taxes you have to pay and when you have to pay them. If you are the sole proprietor or in a partnership, then you could claim income on your personal return as business profits get distributed directly to the owners. Other types of business structures that have employees and are withholding employment taxes will have to file corporate returns or a combination of corporate and personal returns, such as C corporations.
Types of Business Taxes
After determining the type of business structure you are operating, you can then file the appropriate tax forms as well as submit payments during the right tax schedule. The IRS has a convenient tax calendar that can help you pay taxes on the appropriate day, week, and month of the tax year. There are generally seven types of taxes you may have to pay to federal or state agencies. These taxes may be paid on a semi-weekly, monthly, quarterly, or yearly basis.
- Income taxes
- Self-employment taxes
- Sales taxes
- Employment taxes
- Estimated taxes
- Unemployment taxes
- Excise taxes
Income taxes are due annually for any business or self-employed individual that does not expect to pay $1,000 in business taxes in one year. Since most people will pay a greater amount, you are required to file estimated taxes on a quarterly basis on the 15th day. Basically, you pay these taxes when you earn the income, and the amount you pay may fluctuate during each quarter.
Self-employment taxes refer to Medicare and Social Security taxes that independent contractors have to pay if the business does not take out employment taxes. These taxes will cover your social security benefits when you retire or become disabled. Employment taxes can be paid with the estimated taxes on a quarterly basis.
If you operate a retail business that has a physical store location in a state that requires sales tax, or you sell the majority of your services in a state that has sales taxes, then you have to pay these taxes at the rate specified. You are also subject to sales tax if you operate an e-commerce site to offer products online. These taxes are paid to the state revenue agency on a monthly basis or quarterly basis.
If you have employees, you are required to withhold taxes for Medicare, Social Security, state income taxes, and federal income taxes from their wages. You can select two different tax payment options: semi-weekly or monthly. The semi-weekly pay schedule requires you to pay taxes collected from Wednesday to Friday on the following Wednesday of every week and pay collected taxes from Saturday to Tuesday on the following Friday. If you choose the monthly pay schedule, you have to pay employment taxes on the 15th day of the following month.
All income that is not subjected to withholding and is more than $1,000 in a business year should be paid quarterly. You will normally pay state and federal estimated taxes on or before April 15th, June 15th, September 15th, and January 15th.
If you have employees, you also have to deposit federal unemployment taxes (FUTA). These taxes are due at the end of each quarter on the last day of the following month. There is a limit of $7,000 in federal unemployment taxes that you have to pay for each employee. If an employee’s year-to-date wages exceeds this amount, you don’t have to pay any more. You also have to pay state unemployment insurance taxes (SUI or SUTA).
Excise taxes are special federal taxes some businesses have to pay based on the services they offer — if they sell certain items, if they operate certain types of equipment, or if they operate wagering activities. Excise taxes also involve certain environmental taxes, fuel taxes, air transportation taxes, communication taxes, retail sales for tractors and other heavy equipment, and specific manufacturer taxes. Payment is normally made each month.
Failure to Pay Small Business Taxes
The IRS does not look kindly on small businesses that do not pay their taxes on time, or submit tax forms with inaccuracies. You will get hit with a 0.5% to 1% penalty per month for failure to pay. If you pay late and don’t file your returns on time, you might see a combined penalty as high as 25% for the first five months, which lowers to 0.5% for every additional month until reaching 47.5%, according to Nolo. You may also get hit with a penalty if you underpay your estimated taxes.
How to Avoid Penalties if You Can’t Pay Small Business Taxes
Don’t ignore the IRS if you can’t pay your business taxes. Always file the paperwork on time to show you are taking responsibility for your business taxes and to avoid penalties for non-filing. Then take the initiative and contact the IRS. You may be able to ask for an extension as well as a tax penalty leniency. You can also work with the IRS to set up a business installment agreement to make monthly payments. There may be fees involved when you agree to an installment plan, so contact the IRS to obtain further details.