When planning a small business you need to decide what type of business entity you will have in order to determine what small business taxes you’ll need to pay.
A small business can be:
- A sole proprietorship is when one person owns an unincorporated business. This type of business keeps the personal and business expenses tied together and you report business income as part of your personal tax return.
- A limited liability corporation has members. The membership isn’t limited and can include family members, other individuals, corporations, and foreign entities. There are even LLCs of just one person. Like corporations the members of an LLC have very limited personal liability for the small business debts or actions. Yet like a partnership an LLC has lots of flexibility when it comes to management and tax benefits.
- A partnership is a legal arrangement where two or more people join together in a small business. The legal arrangement details what money, labor, skills, or money, are put into the business by each partner and how profits and losses are shared.
- A corporation allows shareholders to exchange their property and money for capital stock in the corporation. Generally a corporation can take the same type of deductions as a sole proprietorship along with special corporate deductions. There are several types of corporations.
The type of a small business you have will determine which taxes you need to pay and the type of tax form you have to fill out. There are basically four types of business taxes for small business. You may need to pay some or all of these taxes. The four types of taxes for small business include income tax on any profit or income made, self-employment tax which is Medicare and social security for those who work for themselves, excise tax on specific products like motor fuels, and if you pay employees you will have to pay employer taxes.
Once you’ve decided what type of small business to have you may need to get a tax identification number for the business. This is called an Employer Identification Number or EIN. If you are self-employed or have a small business this identification number allows you to keep your business and personal expenses separate. It is also one of the steps that you need to complete if you want to establish credit for your small business without using a personal guarantee.
Employer Identification Number
An Employer Identification Number is a number for your business that works much like a social security number does for individuals. The EIN is a federal tax identifier. This number will identify your business to the state and federal government when you file taxes. You will need the number keep your business expenses, bank accounts, and taxes separate from your personal finances. An Employer Identification Number is also known as an Employer Tax ID.
State Taxes for Small Businesses
Depending on the state where you have your small business you may need to pay business or corporate income tax, and if you sell products you may also have to collect and pay sales tax. The type of taxes that you have to pay and the forms you have to fill out for the state will depend on the legal structure of your business, just as it does with federal taxes.
The state you live in may also require you to get a state tax ID number. You will need this number to account for any state income tax withholding, state specific sales and use taxes, and any unemployment insurance tax if you have employees.
Small Business Tax Returns
If you have a sole-proprietorship your small business and personal finances are tied together and you report them on a 1040, then the federal income tax laws in 2010 require you to file an income tax return if your net earnings from self-employment or a small business are $400. If you didn’t make $400 you may still have to file an income tax return if you meet some of the other Form 1040 requirements that are in the instructions. This may be how you file small business taxes if you are a sole proprietorship and don’t have a separate EIN number for the business.
A Schedule C is used to compute any profit or loss for the business. If you have several different businesses you would need to do a different Schedule C for each business. There is a Schedule C-EZ form for those small business owners who have only one sole proprietorship business. You can use this form if you didn’t have a net loss and can meet the requirements in the Schedule’s Part I.
There are different forms required if you are a partnership, corporation, or LLC. You will need to file the correct forms to report income or loss, any sales or excise taxes due, as well as any employer taxes if you have paid employees working for the small business. You should speak with an accountant and make sure that you are filing your small business taxes correctly based on the type of business that you have.