The internal revenue service states there are five types of business taxes, each with its own set of rules and tables to follow. The kind of income tax you file will depend on what type of classification your business structure belongs to. If you are not careful, business taxes can become confusing reasonably quickly. At Furgeson Rawls and Raines we are happy to assist you in understanding the laws, as well as structuring the legal documents needed so that your taxation requirements are met. So, what are the five types of business taxes and how do they work?
Every business except partnerships must file an annual income tax return. Partnerships instead file whats called an information return. There are several forms you may use to submit your taxes. However, the type of form you will need depends on how your business is structured.Typically employers will automatically withhold income tax from the employee's paychecks. If you are self-employed and do not pay your tax through withholding, you might have to pay estimated tax. If you do not have to make an estimated tax payments, then you will be allowed to pay any taxes due when you file.
Self-employment tax is paid when an individual has net earnings of $400 or more in self-employment income over the course of the year. Small business owners must pay the government to help fund Medicare and Social Security. Both the company and the employee must pay taxes into these programs. Unfortunately, when an individual is self-employed, they must pay both the company and the employee shares of this tax.
Individuals typically pay self-employment tax on a little more than ninety percent of their net earnings. While the self-employment tax is a tax-deductible expense, it still represents the high cost of being self-employed. While social security is part of the tax, it is no longer valid once net income reaches a low six figures. However, all net income is subject to the Medicare tax. Self-employed individuals must pay self-employment tax as a condition of receiving Social Security benefits upon retirement.
Individuals, sole proprietors, partners, and S corporations typically must pay estimated tax payments if they expect to owe one thousand dollars or more when they file their taxes. However, corporations must only make estimated tax payments if they plan to owe tax of five hundred dollars or more when they file their return. Taxes must be paid as you generate income throughout the year, either by withholding or estimated tax payments.
Estimated tax is used to pay income tax and also taxes such as the self-employment tax. If you do not withhold enough tax, or you are in business for yourself; you will need to make estimated tax payments. Be warned though, if you do not pay enough out in taxes throughout the year you may be charged a penalty fine. You may also be charged a penalty if your estimated tax payments are late, even if you will be getting a refund.
Employers must deposit and report all employment taxes and at the end of the year, must prepare and file a W-2 form, as well as a statement to report tax and wages, tips, and other compensation paid to an employee.
Employers are required to withhold federal income tax from an employees' wages. To help employers figure out how much tax to withhold, the IRS has released an online publication called The Employer’s Tax Guide. By using a tax table and publication 15 of the tax guide, the business owner can calculate how much they will need to withhold from each employee. An individual must deposit their withholdings. However, the requirements for depositing vary based on your business structure and the amount you withhold.
Employers are also legally required to withhold at least part of social security and Medicare taxes from an employees' wages. However, while the employee is responsible for paying for that part of the taxes; employers report and pay whats known as FUTA, or, Federal Unemployment tax, separately from federal, social security, and Medicare taxes. Since it is not the employee's responsibility to pay this tax, employers must pay FUTA tax only from their funds.
You must pay an excise tax if you make or sell certain products, use certain kinds of equipment, facilities, or products, operate specific types of businesses, or receive payment for certain types of services. These services are rolled up into several broad categories and can include environmental taxes, fuel taxes, communication and air transport taxes, taxes on retail or heavy trailers and trucks, and manufactures taxes on the sale or use of a variety of different things. Also, there is a federal excise tax on certain vehicles and buses used on public highways that have a total gross weight of fifty-five thousand pounds or more.
At Ferguson, Rawls, and Raines, our business law attorney services can assist you in determining the best way to structure your business, as well as explain how your taxes should be filed. Contact us today to speak with one of our highly skilled business law attorneys.