Taxes for Small Businesses Made Easy

Posted 3 years ago by Max Komonov

Deciding to start a small business can be a daunting task. Many new business owners don’t know what to expect, which can cause some anxiety or fear. Business owners have to keep up with records and make sure their taxes are recorded correctly. For these and other reasons, lots of new small business owners find themselves fretting over their taxes.

Understandable. But not inevitable! We are here to help ease any anxiety or fear when it comes to doing your taxes as a business owner. And we’re here to tell you that there are a ton of ways to take the stress out of the season, from business write-offs to getting organized ahead of time! If you start out on the right foot and record your expenses as you go, you may actually be amazed at how much you can save.

What Factors Determine Your Taxes?

There are two main factors that determine how much tax, the legal entity you choose to create your business under, and the state you operate your business in.

Legal entity

When you set up your business there are four main legal entities you can choose from. Your choice will impact how you pay your taxes and what tax rate you will have to pay.

Sole proprietorship

If you choose to run your business as a sole proprietorship your business taxes will not be separate from your personal taxes. The internal revenue service (“IRS”) will not recognize your business as a separate legal entity for tax purposes. There are a few tax deductions you can take advantage of as a sole proprietorship, however, since your business is not legally separate from you as an individual it can be difficult to determine if you qualify for certain tax deductions. For this reason, it is not advised that you continue your business as a sole proprietorship long term. You could be losing out on a lot of savings each year with your taxes.

Partnership

Similar to the sole proprietorship, a partnership’s income is not taxed as business income, rather each partner will report their share of the business’s income as their own personal tax returns. If you have more than one member it is usually recommended by professionals that you consider registering as an LLC or incorporating your business.

LLC

The LLC is often the most recommended for small businesses. It is the perfect mixture of a partnership and a corporation. You can choose how you want to be taxed. You can either use the LLC as a pass-through entity or be taxed as a corporation. Most entrepreneurs will decide to use the LLC to be taxed as a pass-through entity rather than a corporation because you can avoid double taxation.

Corporation

Corporations often get the short end of the stick when it comes to taxes as an individual with a business. If you own a corporation, you have to pay a corporate tax on the business income as well as pay tax on your income you were paid by the corporation. If your business is still relatively small most of the time it is better to stick with the LLC option rather than incorporate your business. If you are not sure which would be best for your situation, consider reaching out to a business or tax professional before making the leap to incorporation.

State taxes

The second factor that will have a big impact on your taxes is your state’s income tax rates and business tax laws. There are some states that are very business-friendly when it comes to taxes and others that want to squeeze every penny they can out of your business.

Business-friendly states include: Florida, Nevada, New Hampshire, Utah, Alaska, and South Dakota. Some states you may want to reconsider include: California, Arizona, Louisiana, New York, New Jersey, and Vermont.

The treatment of taxes and businesses varies greatly from state to state. For example, Nevada does not have an income tax or corporate tax. Additionally, New Hampshire has no sales tax. If you are wanting to open a storefront that sells products you may want to consider New Hampshire because you won’t have to worry about paying sales tax on anything.

On the other hand, there are some states that you may want to avoid doing business in if you can. California and New York have some of the highest tax rates in the United States, which will eat into a big portion of your profits. New Jersey has the highest property tax in the United States, making it a place to avoid if you are going to have a physical location. New Jersey also has the second highest corporate income tax, so you may want to reconsider it if you are thinking of incorporating your business.

Business Taxes You Should be Aware Of

As a business owner, your taxes will look different than the average person who is an employee working for someone else. One benefit of being an employee is you can go almost the entire year without worrying about your taxes. You get your W-2 in the mail from your job and that is all you need to file your federal taxes and state income taxes. However, as a business owner, there are some taxes that you will be responsible for now. These taxes include:

Self-employment tax

As a business owner, you still have to pay medicare and social security tax on your income. For federal taxes, the self-employment tax rate is 15.3% of your business’s net income for the year. You will also have to pay state income tax, but this will vary depending on your state’s income tax rate.

Payroll tax

If you have employees you will have to make sure to withhold federal income tax, Medicare, and social security properly from your employees’ paychecks.

Excise tax

Depending on your business you may owe an excise tax. This is a federal government tax on businesses that manufacture or sell certain products. It may also apply if you use certain equipment, facilities, or products.

Sales tax

Sales tax is a state tax that any business may have to pay if they sell goods. Some states still like to tax you if you perform services. Make sure you register your business to help make sure you are paying taxes properly and look up your tax rate so you know how much to set aside in order to pay your taxes.

Property tax

Property tax is another state tax that you may or may not have to pay depending on whether you own a building that you do business out of and which state you live in. Property taxes vary widely across the United States, if you are considering purchasing a business building, you may want to check the state’s property tax.

Benefits of Paying Tax as a Business

While taxes seem like a pain (as they normally are), there are some benefits of being a business owner rather than an employee. This comes in the form of expenses and write-offs. While you have the burden of tracking all these expenses and write-offs if you create a system that works well and helps you stay organized you may find yourself actually enjoying taxes. Well, maybe we shouldn’t go that far. But at least you can make the process bearable!

These write-offs can be a number of things: if you do business over golfing, that counts as an expense! If you take all your employees out to lunch and pay for their meals, that is an expense. If you use part of your house for your business, that can be an expense. Keeping up with all these different kinds of expenses can really save you a lot of money when it comes time to pay taxes.

Here is a very simple example to show you how being a business owner can save you money.

Unlike an employee, businesses get the benefit of deducting their expenses prior to being taxed. For example, say an employee makes $100 a day and is taxed at a 10% rate and they want to go out to eat with some co-workers at lunch. That lunch costs them $15. These co-workers even discuss work while out at lunch. So after taxes that employee has $90 leftover, and then spends the $15 for lunch. Now that employee is left with $75.

On the other hand, say you are the business owner. You make $100 that day and are taxed at a 10% rate. You decide to go to lunch with some of your employees and you discuss work. You spend $15. Well that $15 is an expense! So you would take your $100 write off the $15 and you’re left with $85 and then taxes hit. So rather than being taxed $10 you are only taxed $8.50. So you are left with $76.5.

While this example is a simplified version, it does show the power of expenses and writing those off. These expenses tend to be higher than just $15 and tax rates don’t tend to be as high as 10% but we wanted to keep the math simple.

Conclusion

These tips are to help you start thinking of how to handle your taxes as a business, and to get oriented with some basic tips. Always seek tax advice from a tax professional if you have specific questions about your business’s taxes. At any rate, we wish you the best of your business venture, and encourage you to have no fear about getting those taxes done!

To help you out with taxes, Ecwid can calculate taxes automatically for merchants in the USA, the EU, Canada, Australia, and New Zealand.

About The Author

Max has been working in the ecommerce industry for the last six years helping brands to establish and level-up content marketing and SEO. Despite that, he has experience with entrepreneurship. He is a fiction writer in his free time.