What Are the Different Types of Business Taxes That Exist Today?
On average, small businesses in the United States pay 19.8 percent in taxes each year. Nearly every business in the United States is considered a small business, yet not all business owners know the taxes they should be paying.
The IRS defines the types of business taxes into four general categories, though they can vary from state to state. If you do not know the kind of taxes you should be paying, you can end up paying less than your share and running into trouble with the IRS.
Read on to learn about the various types of business taxes to see what applies to you.
Types of Business Taxes: Income Tax
The IRS requires that all businesses except partnerships file income tax returns. Some businesses use the withholding method of paying taxes, so they pay as they earn income. Other businesses use estimated taxes, paying them when they file a federal income tax return.
Some states also require further income taxes based on the business’s legal structure.States require that businesses with employees pay state employment taxes to cover unemployment insurance. States like California, Hawaii, New York, Rhode Island, and New Jersey require taxes to cover disability insurance.
Self-employment tax is a social security and Medicare tax for individuals who work for themselves. It also applies to those who are sole proprietors, and members of limited liability companies. It contributes to your social security coverage.
Social security coverage allows you to have retirement benefits, survivor benefits, disability benefits, and hospital insurance benefits (Medicare).
An employer has to pay employment taxes. These taxes cover Medicare and social security taxes, federal unemployment tax (FUTA), and federal income tax withholding for its employees. The employer pays half of the cost from their pocket and withholds the other half from the employees’ paychecks.
Employers cover all of FUTA costs.
States require that businesses with employees pay state employment taxes to cover unemployment insurance. States like California, Hawaii, New York, Rhode Island, and New Jersey require taxes to cover disability insurance.
Sales tax is triggered when someone makes a retail purchase of tangible goods. The customer is who pays the sales tax, but the seller must collect the taxes and hand them over to the state. Where they are in effect, sales taxes are mandatory for all cash transactions, credit sales, layaway sales, installment sales, and sales involving trade-ins.
It applies to online sellers, as well. If you are a small business owner who sells primarily online, you may be able to get your tax compliance done for free using the Streamlined Sales Tax program.
Know Your Applicable Taxes
Business ownership comes with the responsibility of knowing what taxes you need to pay. By learning about the types of business taxes the IRS requires you to pay, you can avoid penalties and more severe consequences. For help managing your taxes, you can turn to qualified professionals and programs like the Streamlined Sales Tax program for eCommerce.
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