Running a small business in the United States can be extremely complicated. One of the most frequently befuddling aspects of running a small business is the payment of taxes. The United States is a federal nation – meaning that each individual state can levy its own taxes as well as the central government. This means that small businesses pay vastly different rates of tax depending upon which state they are registered.
This brief guide has been designed to help small business owners identify the different kinds of tax they are expected to pay. It is important to conduct your own research and to seek the help of professional accountants if you are in any way unsure of what taxes you need to pay.
Property Tax
Property tax is a tax levied by local governments on the value of real property, such as land and buildings. In the United States, property taxes are a significant source of revenue for many local governments and are used to fund a wide range of services, such as schools, public safety, and infrastructure.
Small businesses are often subject to property taxes because they typically own or lease real property, such as buildings or land, to conduct their operations. As a result, property taxes can have a significant impact on the bottom line of small businesses, particularly those that own or lease high-value commercial properties. In Connecticut, where Michael Savage of 1800Accountant practices, there are several exempt forms of property. These exemptions are designed to help provoke economic growth in the area. Exclusion areas are also regularly implemented by local governments in order to provoke growth within areas that have been previously neglected.
Property taxes are typically calculated based on the assessed value of the property, which is determined by local assessors. Assessed value is often used as a starting point for calculating property tax liability, but it may be adjusted based on a number of factors, such as the use of the property, local market conditions, and the property’s physical condition.
Small businesses may be able to reduce their property tax liability through a number of strategies, such as appealing the assessed value of their property, seeking tax incentives or abatements, or negotiating property tax assessments with local officials. Additionally, some states offer property tax relief programs for small businesses, such as those that provide property tax credits or exemptions for certain types of businesses.
Income Tax
A large portion of all of the taxes paid by small businesses is considered income tax. There are a huge amount of variables at play that decide just how much income tax a business has to file. If a business is considered a ‘pass through’ organization, then it does not have to pay corporate income tax. This is because it is expected that all funds earned will pass through to the owners of the company, who will then have to file their income as part of their personal tax returns.
Most businesses, however, are expected to pay some kind of corporate income tax. Since 2018, the nominal federal corporate tax rate in the USA has been at a flat 21 percent. State corporate income taxes differ wildly, ranging from 1 to 12 percent across the country. The level of corporate income tax levied by successive governments has been subjected to a huge amount of political scrutiny over the years. Some commentators see corporate taxation as one of the most divisive issues in American politics – representing the way in which people see the role of the state and the federal government in the running of the country.
Self Employment Tax
Many small business owners are self employed. Self employment tax refers to the tax owed by self employed individuals for Social Security and Medicare. It is calculated as a percentage of a person’s net self employment income. If you own a small business and are considered self employed, you’ll need to pay self-employment tax, which includes both the employer and employee portions of Social Security and Medicare taxes. The tax rate for the self employment tax is currently set at 15.3%. As a small business owner, you are responsible for paying the entire amount yourself, as there is no employer to split the cost with you. However, it is possible to deduct half of the self employment tax from gross income when calculating your federal income tax. Failure to pay self employment tax can result in penalties and interest charges
Sales Tax On Products And Services
There is no federal sales tax implemented in the United States. Instead, each individual state is responsible for raising its own funds by levying a tax on the sale of all products. Companies typically pass the responsibility for paying income taxes on to their customers – adding an additional cost onto the price of each thing that they sell. Sales tax varies massively on a state by state basis.
Excise Tax On Use And Consumption
Excise tax is a tax on the use or consumption of a specific product or service. In the United States, excise taxes are typically levied at the federal or state level on products such as gasoline, alcohol, and tobacco, as well as on services such as telecommunications and transportation.
Businesses that produce or distribute products subject to excise tax must pay the tax when the product is sold or used. The amount of the excise tax is based on the quantity or volume of the product, as well as its specific type or category. For example, the federal excise tax on gasoline is based on the number of gallons sold, while the excise tax on alcohol is based on the volume of the product and its alcohol content.
To calculate their excise tax liability, businesses must determine the volume of the product they produce or sell and then multiply that amount by the applicable tax rate. The business must then collect the tax from their customers and remit it to the government. Businesses must also comply with a number of regulations related to excise tax, including recordkeeping requirements and filing deadlines.
Employment Taxes Paid On Staff Earnings
Employment taxes are taxes that employers are required to withhold and pay on behalf of their employees. In the United States, employment taxes include Federal Insurance Contributions Act (FICA) taxes, which are used to fund Social Security and Medicare, as well as federal income taxes. In most cases, the federal employment tax rates sits at around 15.3 percent of each staff members’ earnings. Half of the taxable amount is covered by the employer, and half is taken out of the employee’s wages.
Small businesses are often subject to employment taxes, which can be a significant burden, especially for those with a large number of employees. Employment taxes are calculated as a percentage of each employee’s earnings and must be withheld from their paychecks and remitted to the government on a regular basis.
In addition to the cost of employment taxes, small businesses must also comply with a number of regulations related to employment taxes, including recordkeeping requirements and filing deadlines. Failure to comply with these regulations can result in significant fines and penalties, which can further impact a small business’s bottom line.
Small businesses can reduce the impact of employment taxes by optimizing their payroll processes and taking advantage of tax credits and deductions. For example, small businesses may be eligible for tax credits for hiring certain types of employees, such as veterans or individuals with disabilities. Additionally, small businesses may be able to deduct a portion of their payroll taxes as a business expense, which can help to reduce their overall tax liability.
Gross Receipts And State Income Tax
A gross receipts tax is a tax on a company’s total revenue, regardless of whether it is profitable or not. This tax is applied to all businesses and can be levied at the state or local level. In the United States, gross receipts taxes are used by some states as an alternative to corporate or sales taxes.
Small businesses are often subject to gross receipts taxes, which can be a burden because they must pay the tax even if they are operating at a loss. This can lead to increased costs for small businesses and can affect their ability to invest in growth or hire new employees. In some cases, the tax may also discourage businesses from expanding and creating new jobs in the state or local area. In the recent genre-bending silver screen hit ‘Everything Everywhere All At Once’, the main character Evelyn is struggling to justify business expenses while going through a gross receipts tax audit before she gets thrown into the fractious adventure that forms the crux of the film.
State income tax, on the other hand, is a tax on a company’s profits or income. Like gross receipts taxes, state income taxes can also impact small businesses, as they must pay the tax on their net income. However, unlike gross receipts taxes, state income taxes only apply to businesses that are profitable.
Corporate Shareholder Dividend Tax
Companies regularly pay their shareholders dividends. In the United States, when a corporation declares and pays a dividend to its shareholders, the dividend is taxed twice: first at the corporate level, and then at the individual shareholder level. At the corporate level, the dividend is treated as a taxable distribution and is subject to federal income tax. This tax can range from 15% to 21% depending on the corporation’s taxable income and tax bracket.
At the individual shareholder level, dividends are taxed as ordinary income and are subject to the same tax brackets as wage income, which range from 10% to 37%. For individuals who hold dividend-paying stocks in taxable accounts, the dividend income is reported on their individual tax returns and is subject to federal income tax based on their marginal tax bracket.
It’s worth noting that qualified dividends, which are dividends paid by US corporations or by certain foreign corporations, are subject to lower tax rates than ordinary dividends. To be considered a qualified dividend, the stock must be held for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.
Additionally, there are some exemptions and special rules for dividend taxation for certain types of investors, such as those who hold stocks in individual retirement accounts (IRAs) or qualified pension plans, as well as for certain foreign investors. In these cases, the tax treatment of dividends may be different.
