As a business owner, you are responsible for paying federal state, and local taxes. However, what and how you pay these taxes will vary according to the type of business you own and how it’s classified. A small business owner will navigate his or her taxes differently than a corporation will, although there is a tax responsibility for every kind of business, both personal and corporate. 

Income Taxes for Small Businesses

Everyone is required to pay taxes. This includes the self-employed as well as corporations and people who don’t work for themselves. We all have tax liability as working people and as entities or companies. Self-employed individuals pay taxes on their income. Self-employed people are considered social security and medicare tax based on the business’s net income for the tax year. If you run a business with others the net income is divided among the owners, based on their business agreement. Net income is determined by income minus expenses. Owners of LLCs or limited liability corporations can also choose to be taxed as a corporation. This is true for single-member LLCs and partnership LLCs. Small businesses include sole proprietors, partners in a partnership, and LLC owners. Taxes for Social Security and Medicare are paid based on the net income of the business.

Income Taxes for Corporations

There is a big difference between self-employment taxation and corporate tax responsibility. Corporations are considered separate entities from their owners when it comes to taxes. Corporations are required to file IRS tax form 1120 annually. The net income of a corporation is determined by the distribution of net income among shareholders. However, if these dividends aren’t distributed to shareholders their net income isn’t taxed and these profits are considered retained earnings. S corporations are a lot like partnerships in that the owners of the S corporation divide up the income of the business. Each owner gets a Schedule K-1 to file their income taxes. Since self-employed people pay taxes on their net earnings, no earnings are equal to no taxes due. Owners of corporations, including S corporations, aren’t considered self-employed. Therefore, these entities aren’t required to pay self-employment taxes.

Other Business Taxes…

Businesses are also required to pay a sales tax on products and services that are sold in specific states, as well as property tax for business properties, and excise taxes on use and consumption. Other business taxes include: 

Employment or Payroll Taxes for Employee Earnings
Gross Receipts Tax and State Income Tax for Businesses
Dividend Tax for Corporate Shareholders

Regardless of your classification as a business owner, there’s tax liability. However, how much you pay, and “if” and when you pay your taxes will depend heavily on your tax classification. 

The experts at Gipson Commercial Solutions would like to become your preferred partner for business financing. They specialize in a full spectrum of alternative financing programs. Give them a call today.