Business owners know that taxes are not a simple matter. Whether you have several employees or you’re a sole proprietor, your tax situation will likely be complex and based on factors unique to you and your business. While there’s no “one size fits all” when it comes to taxes on businesses, there are some areas that you need to know about.
Federal and State Taxes
The legal structure of your business—sole proprietorship, partnership, LLC, or other—will affect the way your federal and state taxes are handled. The structure you choose will depend on the size and operations of your business, but you should consult an accountant about your individual tax planning. Planning in advance is necessary to make sure you will have the funds on hand to pay the taxes you owe.
Most business owners will pay quarterly taxes, which are prepayments on the estimated total federal taxes that will be due for the tax year. This applies to sole proprietors, partners, and members of an LLC, as well as individuals who work as contractors and freelancers. Some states also require quarterly payments for their taxes.
Self-employment taxes are extra taxes that cover contributions to social security and Medicare. The self-employment tax rate is 15.3%; 12.4% to go toward social security and the remainder toward Medicare. These taxes are added to the amount you owe for federal income tax.
The self-employment tax doesn’t just apply to independent contractors or sole proprietors. An LLC owner needs to pay self-employment taxes on all their business profits. Partners must also pay self-employment taxes on their personal as well as their business income.
Understanding deductions is crucial to business owners who want to reduce the amount of tax they owe. The IRS will allow what they consider “ordinary and necessary” deductions. The tricky part comes in knowing what deductions the IRS considers necessary.
Common deductions include business operations costs such as insurance and loan interest, vehicle expenses, advertising costs, legal fees, and office supplies. Travel and meal expenses may also be deductible. Individual businesses differ, so you should consult an accountant before claiming a deduction.
Although taxes for businesses and self-employment can be complicated, having a solid understanding of tax laws and procedures can help. With advanced planning, you can legally reduce the amount of taxes you owe and pay them on time.
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