Navigating the Tax Landscape for Small Businesses: Understanding Rates and Types

Every law-abiding citizen must pay taxes because they are an essential source of revenue for the government to provide services to the public, including infrastructure, public safety, education, and healthcare. Without taxes, these services would not be possible, and the quality of life for everyone would be significantly diminished. Different people pay different amounts of taxes, and businesses are no exception.

Businesses pay taxes that are proportionate to their size. This can present a problem for small businesses because they do not spend too much, and the taxes they have to pay are usually too high for them to afford. As a result, governments often provide incentives for small businesses to help them out. However, small business owners should know the different tax brackets to ensure they are not paying too much. Few people know how this works, so we will discuss the details in this article.

The Different Types of Taxes

Small businesses are required to pay any of the following taxes:

Sales Tax

If your business operates in a state that taxes sales of goods and services, you must collect the tax from your customers and submit it to the state. Usually, customers pay the sales tax, but businesses sometimes have to pay it themselves.

Payroll Tax

As an employer, you are responsible for taking money from your employees' wages to cover Social Security, Medicare, and unemployment taxes. If you do not withhold these taxes from your employees' paychecks, you will be held financially responsible for the taxes that were not taken out. In short, you can be punished with fines or other consequences if you do not pay the taxes you are legally responsible for paying to the IRS.

Property Tax

Small businesses must pay taxes based on their real estate and tangible property. This could include taxes on the building or land the company is situated on and any equipment, furniture, and supplies used. To ensure all state and local tax regulations are followed, you must always file the necessary paperwork.

Self-Employment Tax

If you are running a business that is not set up as an S Corporation, then you will need to pay self-employment tax on the money you make from your company. This tax rate is 15.3% of your earnings up to a maximum of $137,700. Anything you earn above that amount will be taxed at 2.9%.

The owners, not the business itself, are responsible for paying these taxes. However, the figures that the owners report as the business' income are essential in deciding how much self-employment tax they must pay.

The Small Business Federal Tax Rate

The amount small businesses owe can vary depending on certain factors, such as income generated and the nature of the business entity. Because of this, small business owners must consider all of the implications of setting up a business to minimize the amount of tax due.

With that out of the way, here are the different tax brackets for small businesses:

For C Corporations

If your business is a C corporation or has chosen to be treated as one, you will be taxed at a flat rate of 21% on your net income. This rate applies to the amount of money you have made after subtracting any eligible expenses you can deduct, so there is no longer a tiered tax system for C corporations.

Any money earned by a small business will be taxed only at the business's rate. However, any salary paid to the small business owner will be taxed according to the owner's tax rate. The salary will still be considered a legitimate business expense, which can be deducted from the business's total income.

For Pass-through Entities

Many small businesses are structured differently than corporations. Instead of paying taxes at the entity level, the income is passed to their owners, partners, or shareholders. This means that these individuals will be responsible for reporting and paying taxes on the business profits on their personal tax returns. This is different from corporations, which pay taxes at the entity level.

If you make a lot of money, you will have to pay more taxes on your business income than someone who makes less. If you make a small enough amount of money from your business, you may not have to pay any taxes. However, if you make enough money from your company and other sources, you will have to pay the highest possible tax rate, which is 37%.

Conclusion

Small business taxes are structured differently than corporate taxes but can still be complicated. Regardless, small business taxes are essential for staying compliant with the law and making sure you are paying the correct amount. As long as you keep accurate records, know the tax laws for your business, and pay your taxes on time, you can stay on top of your taxes.

Hawk Tax Solutions provides top-quality services for business taxes. Our professional accountants will ensure your books and accounts are organized to help you make the best financial decisions for your company. Call us today at (214) 728-5120 and allow us to help you!