How Much Do Small Businesses Pay in Taxes?

Why Are Small Businesses Important For The Economy?

If you’ve ever wanted to start a small business, then you know just how important they are to our economy. Small businesses are those independently owned and operated companies that have fewer employees and generate lower revenue than larger corporations. 

But don’t let their size fool you – small businesses are a driving force behind job creation, innovation, and economic growth. They make up a huge percentage of businesses in the United States, and they’re responsible for creating millions of jobs each year.

So, if you’re thinking about starting your own small business or just curious about how they operate, one important thing to consider is how much you’ll have to pay in taxes. It’s not the most exciting topic, but it’s an important part of running any business.

Let’s take a look at how much small businesses pay in taxes and why it matters.

Types of Taxes Small Businesses Pay

Now that we’ve established the importance of small businesses, let’s dive into the different types of taxes that they have to pay. Small businesses are subject to a variety of taxes at the federal, state, and local levels. Here are some of the most common types:

  • Federal taxes:
    Federal taxes that must be paid by small enterprises include income taxes, Social Security taxes, and Medicare taxes.
  • State taxes:
    Depending on the state in which a small business operates, they may be required to pay a variety of state taxes, such as income taxes, sales taxes, and payroll taxes.
  • Local taxes:
    In addition to federal and state taxes, small businesses may also be subject to various local taxes, such as property taxes and business license fees.
  • Sales taxes:
    Sales tax collection and remittance are often requirements for small businesses that offer goods or services to their clients.
  • Employment taxes:
    Employer taxes, such as worker’s compensation insurance and unemployment insurance, must also be paid by small businesses. 

Related: Bookkeeping for Dummies: How To Do Bookkeeping for a Small Business

Taxation Methodology for Small Businesses

The way a small business is taxed depends on its legal structure. Here are some types of legal structures for small businesses and how they’re taxed:

  • Sole Proprietorship:
    This is the simplest type of legal structure, and the business owner is personally responsible for all business taxes.
  • Partnership:
    In a business where ownership is shared by two or more individuals, those individuals are responsible for paying taxes on their share of the business’s profits. This applies to all owners of the business, regardless of how much of the business they own. 
  • Limited Liability Company (LLC):
    LLCs are taxed similarly to partnerships, but they also have the option to be taxed as a corporation.
  • Corporation:
    Corporations are separate legal entities and are taxed on their own income. The owners of the corporation (shareholders) are also subject to taxes on any dividends they receive.

What are the Common Tax Deductions and Credits for Small Businesses?

Small businesses can take advantage of a variety of tax deductions and credits to reduce their tax liability. Here are some of the most common ones:

Home office deduction:

If you use a portion of your home for business purposes, you may be able to deduct some of your home-related expenses from your taxes.

Business expenses deduction:

Small businesses can deduct a variety of expenses related to running the business, such as office supplies, rent, and utilities.

Retirement plan deductions:

For their employees, small businesses can set up retirement programs and deduct the payments they spend.

Healthcare deduction:

The cost of the premiums paid by small businesses that offer health insurance to their workers may be deductible.

Small Business Tax Credit:

The government offers a tax credit for small businesses that provide health insurance to their employees.

Related: How to Lower Your Taxable Income and Pay Less in Taxes

Common Tax Mistakes Small Businesses Make

Small businesses can easily make mistakes when it comes to their taxes, which can result in penalties, interest, or even legal action. Check some of the most common tax mistakes small businesses make and how to avoid them:

Late payments and filing:

To avoid fines and interest, small businesses must file their tax returns by the due date and pay their taxes on time. To avoid missing deadlines, it’s important to maintain track of due dates and make appropriate plans.

Not keeping proper records:

To guarantee correct tax filing, small businesses should maintain thorough records of all their revenues and outgoings. It can be challenging to support deductions and credits listed on tax returns without valid proof.

Misclassification of employees:

Small businesses that misclassify employees as independent contractors may face penalties and interest. It’s important to understand the difference between an employee and an independent contractor and classify workers correctly.

Failure to separate personal and business finances:

For accurate tax filing, small businesses should maintain separate personal and corporate finances. When personal and business expenses are combined, it can be challenging to identify which costs are tax deductible which can result in incorrect tax reporting.

If you avoid making these mistakes, you can reduce your tax liability and avoid costly penalties and interest.

For small business owners who might not be familiar with tax rules or regulations, consulting with tax experts is important. To make sure that tax returns are submitted accurately and on time, professional assistance can assist in identifying deductions and credits that can lower tax obligations.

Related: Introducing K9 Bookkeeping – Your Partner in Bookkeeping and Accounting Services

We’re happy you found this article informative! Go back to our blog page to find more tips, tricks, and guidance on bookkeeping, to ensure your business is financially sound and ready to grow to the next level.

Running a business is hard work, bookkeeping shouldn’t be. 

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