As a small business owner, you are the chief cook and bottle washer of your business operations.
Since many things have changed since the Tax Cuts and Jobs Act (TCJA) went into effect a few years ago, you may be hesitant to file your taxes on your own. Don’t be. You can avoid wasting both time and money by acquiring a working knowledge of the types of taxes you are required to pay.
While you are responsible for paying the full 15.3% self-employment tax, keep in mind that you can deduct half of that on your 1040. To maximize deductions, be sure to take advantage of all possible business operating expenses.
If you are living in a state that requires you to charge sales tax from your customers at point-of-purchase, be sure to familiarize yourself with your state and local tax reporting requirements.
While you may rent office space, any other commercial property that you own is taxable and must be paid to your local municipality.
Depending on the type of small business you are operating, you may be responsible for taxes on specific goods such as fuel, tobacco, or alcohol products.
How your business is structured will also determine your specific tax liability. Sole proprietorships, corporations, and LLCs all have different tax requirements.
While the tax reporting is less complicated (you can report them on your 1040 using schedule C), there is more risk involved. However, the new tax law allows you to deduct 20% of your net income, which reduces your liability.
You may have chosen an S Corporation to avoid double taxation. While there are restrictions such as a limited number of stockholders who must be legal residents of the United States, those stockholders pay taxes on their profits when filing their personal income taxes, while you remain eligible for the 20% deduction.
C Corporations, on the other hand, have the double taxation structure. It does expedite funding and landing larger contracts, which makes it a viable option if your goal is to establish your business quickly.
This is a popular option because it offers the best of both worlds. You avoid double taxation while being able to deduct business losses.
Staying up-to-date on tax rates for your business structure is a simple way to take the stress out of tax season. While this information will give you a general idea of how small businesses are taxed, you should consult a financial professional for advice as it pertains to your business.