Business Taxes 101
Business taxes are something every business is responsible for depending on the type of business, number of employees, location, etc. Taxes can be complex but, knowledge is power. Even if you’ve hired someone to deal with the business taxes, understanding how they work is vital.
The following information is provided regarding the four main types of taxes for a business:
Income tax – Unless you are a partnership, you must file an annual income tax return. Partnerships will file an annual information return to report income, gains, losses, and deductions. Individuals within the partnership are taxed based on their share of income from the partnership and will file their profit, loss and deductions as their personal income return.
Estimated taxes – Salary employees have taxes withheld automatically from paychecks. If you are self-employed and part of your income is not withheld when you get paid, it is recommended that you make quarterly estimated tax payments to the IRS. You should be making four payments throughout the year to cover your tax obligation. These payments are due in April, June, September and January. If you wait to make the payments you will accrue penalty fees.
Self-employment taxes – Freelancers, Independent contractors, and other self-employed individuals are responsible for the full contribution to Social Security and Medicare. Many new self-employed people are surprised by their tax bill because they aren’t accustomed to paying the entire amount towards social security and Medicare. As an employee you would pay 7.65% and employers would pay 7.65%. When you are self-employed you are responsible for paying the entire percentage of 15.3% on your net earnings.
Employment taxes – When you have employees you are responsible for deducting or withholding the proper amounts of Medicare and Social Security taxes or FICA in addition to state, federal and income taxes (if required). Employers are responsible for reporting the income and taxes withheld and paying the tax obligation.