Struggling to determine which business taxes you have to pay, when those business taxes are due, and how to maximize your deductions to save the most come tax time?
I’m here to simplify it all for you.
Taxes can be confusing, but this post will help you understand the basics so that you ensure you a) stay legal and b) hopefully save some substantial money (tax-planning strategies are a real thing, lady! I use them every year to help keep more in my pocket and less in the government’s).
Alright, no need to delay getting into everyone’s favorite topic any further.
Let’s rip off the bandaid, shall we?
WHAT BUSINESS TAXES DO I HAVE TO PAY?
One little housekeeping note.
If you are a pass-through entity (i.e. anything but a C Corp), I need you to understand one thing and one thing only:
You are taxed on the PROFIT you make, not the DISTRIBUTIONS you pay yourself out of the company’s bank account.
Let’s say you bring in $100,000, spend $40,000 on expenses, and pay yourself $50,000. What amount will you be taxed on?
If you said $60,000, you’re correct. That’s your profit (income – expenses) and that is what the IRS will consider your income for the year even if, as in this instance, you actually pay yourself less.
Keep that knowledge nugget in your back pocket. You’re going to want to hang on to it.
One of the best ways to save money is to know what expenses to run through your business and what not to. I recently created a freebie aimed at helping female entrepreneurs understand what they can and can’t expense so that they can keep more in their pocket and less from Uncle Sam (in a completely legal way, of course).
If you expect to owe less than $1,000 in taxes at the end of the year OR you expect your employer at your full-time job (if you still have one) to withhold the lessor of a) 90% of your current year liability or b) at least 100% of your tax liability on your previous year’s return, then you don’t have to pay in estimated taxes.
For the rest of us, we need to empty our pockets every quarter.
Taxes are typically due the 15th of April, June, September, and January each year. Don’t ask why they aren’t every 3 months – we’re not getting into that here.
The quarterly tax calculation can get a bit complex, which is why most entrepreneurs simplify by calculating their net profit for the year, multiply it by 25%, and divide it by 4, and make that payment.
It’s a fairly conservative approach but can cause you to drastically overpay, which is why I created an estimated tax calculator you can use year-in and year-out to calculate your quarterly federal estimates.
P.S. Don’t forget to pay these, either – the IRS is like a highly-strict father and if you don’t meet curfew, you’re damned to some punishment in the form of $$$ penalties.
If you hire someone as a W-2 employee (i.e. NOT an independent contractor – see the 1099 section below for how to handle those), then you will be responsible for not only withholding and remitting your employee’s payroll taxes, but you’ll also have to pay your portion as the employer as well.
Payroll taxes are made up of the following:
Federal Income Tax: Only withheld from the employee
State/Local Income Tax: Only withheld from the employee
Social Security Tax: 6.2% is paid by both the employee and employer on up to $132,900 (as of 2019) in wages per employee.
Medicare Tax: 1.45% is paid by both the employee and employer (no income limit)
Federal Unemployment: 6% on the first $7,000 in wages per employee, only paid by the employer.
State Unemployment: Varies. Here’s a link to a list of ranges for each state.
Thus, if you had an employee that made $40,000 over the course of the year, the cost of that employee is much more than the $40,000 because of these other taxes (#3-6) you are also responsible for paying.
Keep that in mind when running the numbers.
One Word to the Wise: If you use a payroll service provider, like ADP or Zenefits, they will typically withhold and remit these on your behalf, in addition to filing the periodic payroll tax returns that are required by the IRS. (FYI – It’s well worth the money to invest in one!)
SALES & USE TAX
Let’s break down the difference:
SALES TAX. When you buy a planner from Target, you not only have to pay the cost of the planner but also any sales tax on it. Target then takes the funds you paid for sales tax and remits them back to the state.
Likewise, if you sell a product (or sometimes service, depending on your state), you will need to collect sales tax on that sale and remit it to your state’s department of revenue.
USE TAX. . If you were sold an item and were not taxed in it but used it within your business or for personal reasons, you should be paying use tax on that item. It’s essentially the same as sales tax (and for most states, the rates are the exact same) except the buyer is paying and remitting the tax (you), not the seller (i.e. Target in our last example).
This sometimes happens if you are a product-based business and buy material to use in making your products and then selling to another end customer.
If you aren’t the end user, you are exempt from paying sales tax as your customer will end up paying it.
However, if you buy the product with the intent to resell it but end up using it in your business, that’s when you have to pay use tax.
This happened a lot in the prior company I worked for. We sold a lot of cleaning supplies but would many times use those supplies to clean our offices. When we did that, we had pay use tax on those supplies because we just became the end user.
You typically pay sales and use tax on the same tax return. If you are unsure if you are obligated to pay, call your state’s department of revenue and explain what business you are in. They will let you know if you have to register for sales/use tax and how often (monthly/quarterly/annually) you have to file.
Most states impose a tax on the tangible personal property in your business – i.e. anything you can physically touch that isn’t your building or leasehold improvements.
That means any intangibles – like patents or software – isn’t included either.
Rates, rules, and deadlines vary by state, so it’s best to consult your CPA or do a quick Google search to see if you have to pay these, too.
Good news: This isn’t another tax!
But it still requires you to file forms and spend a little bit of $$$.
If you pay a US citizen over $600 to perform services for you in the course of your business (think social media manager, bookkeeper, business coach, etc.), then you need to send them a 1099-MISC.
This is a form that basically helps the IRS track that individual’s income (so that they don’t cheat them out of their tax dollars) and are due each year by January 31st.
One tiny stipulation: If you pay through a third-party merchant (like PayPal or when using your credit card), you don’t need to file a 1099. Those entities are required to send a 1099-K to those they make payments to on your behalf, so you’re off the hook on those.
If you don’t file?
Well, you could be looking at some hefty penalties. File just 1 day past the due date, and you’re looking at fines of $50 per 1099. File 31 days past, and it goes up to $100. Past August 1st of that year? $270 per form.
The IRS shows no mercy.
Did you ever think you’d see so many different kinds of taxes in your life?
If you have questions or need help, don’t forget about my resources below.
Or feel free to leave a question in the comments below, send me a DM on Insta, or shoot me an email! Always here to help a sister in need.
Until next time,