Demystifying Business Taxes: A Comprehensive Guide

Recently, Justworks and The Harris Polls surveyed employed adults and small business owners about their attitudes towards entrepreneurship and the future ahead. Not surprisingly, 61% of small business owners found filing taxes to be harder than they anticipated. And a staggering 83% wish they knew more about the ins and outs of small business tax rules.

This complexity often acts as a barrier to entrepreneurship, but in this blog post, we're going to demystify business taxes, break down the confusing bits, and hopefully make life a bit easier for hustling entrepreneurs. Let's jump in!

Understanding Tax Terminology

Let's kick things off by breaking down the three main types of taxes that small businesses need to navigate:

1. Income Taxes: Just like individuals, businesses are required to pay taxes on their earnings. Whether you're making money from sales, investments, or other sources of revenue, you’ll have to pay income tax.

2. Employment Taxes: If you've got employees, you're in for a wild ride with employment taxes. This includes withholding taxes from your employees' paychecks for Social Security, Medicare, and income tax (to name a few). Plus, as the employer, you've got your own set of taxes to cover.

3. Sales Taxes: If your business sells goods or services, you may need to collect and remit sales tax to the appropriate authorities. But beware — sales tax rules can vary dramatically depending on your location and the nature of your business.

Untangling the Web

Now, let's delve into why business taxes can be so tricky.  The tax code can feel like a maze of rules, regulations, and loopholes, but fear not because we're breaking it down into bite-sized chunks. 

• Deductions: These little nuggets of tax gold allow you to subtract certain expenses from your taxable income. Think office supplies, travel expenses, and even that new coffee maker for the break room. However, it’s crucial to do your research before you splurge on something that may not be deductible.

• Credits: Tax credits can slash your tax bill dollar for dollar, whether it's for hiring veterans, investing in renewable energy, or adopting eco-friendly business practices.

• Exemptions: Exemptions allow you to exclude certain income or expenses from your tax return altogether, putting more money back in your pocket.

Filing Business Taxes: Choosing the Right Structure

Now, I know what you’re thinking — this is all fairly easy, right? But according to The Harris Poll, a majority of business owners (59% to be precise) admit that running a small business has been easier than they initially thought…with the exception of aspects like managing health benefits, dealing with legal documentation, and filing taxes. 

So what really makes business taxes so challenging? Business structure. Your business structure not only impacts how you operate but also has significant implications for your tax obligations. Here's what you need to know:

• Sole Proprietorship: This is the simplest and most common form of business structure. As a sole proprietor, you and your business are essentially one and the same. You report your business income and expenses on your personal tax return using Schedule C. While a sole proprietorship offers simplicity, keep in mind that you're personally liable for any debts or legal issues your business may encounter.

• Partnership: If you're going into business with one or more partners, a partnership might be the way to go. In a partnership, the profits and losses are divided among the partners, who then report their share on their individual tax returns. The partnership itself doesn't pay taxes; instead, it files an informational return (Form 1065) to report income and deductions.

• Corporation: Unlike sole proprietorships and partnerships, corporations are separate legal entities from their owners. This means that owners (shareholders) have limited liability for the corporation's debts and legal obligations. Corporations file their own tax returns (Form 1120) and pay taxes on their profits. Shareholders also pay taxes on any dividends they receive from the corporation, resulting in potential double taxation.

• Limited Liability Company (LLC): LLCs offer the liability protection of a corporation combined with the flexibility of a partnership. Depending on the number of members, an LLC can be taxed as a disregarded entity (like a sole proprietorship), a partnership, or a corporation. Most LLCs are taxed as pass-through entities, meaning that profits and losses flow through to the owners' personal tax returns. Refer to this guide to determine how to launch an LLC in your state.

Important Tax Implications to Consider

Now that we've covered the basics of business structures, let's explore some important tax implications to consider when making your decision:

• Tax Rates: Different business structures are subject to different tax rates. For example, sole proprietors and partners are taxed at individual income tax rates, while corporations are subject to corporate tax rates, which can be lower or higher depending on various factors.

• Tax Reporting Requirements: Each business structure comes with its own set of tax reporting requirements. Sole proprietors report business income and expenses on Schedule C of their personal tax return, while corporations must file separate tax returns. Understanding these requirements is crucial for staying compliant with the IRS.

• Liability Protection: Choosing a business structure that offers liability protection, such as a corporation or LLC, can help shield your personal assets from business debts and legal liabilities. This can provide peace of mind knowing that your personal assets are protected in the event of a lawsuit or bankruptcy.

• Ease of Formation and Maintenance: Consider the ease of formation and ongoing maintenance associated with each business structure. Sole proprietorships and partnerships are relatively easy to set up and maintain, while corporations and LLCs may require more paperwork and formalities.

• Flexibility: Think about the flexibility you need in terms of ownership, management, and tax treatment. Sole proprietorships and partnerships offer flexibility in terms of decision-making and tax treatment, while corporations and LLCs may have stricter governance requirements.

By carefully considering these tax implications and consulting with a tax advisor or legal professional, you can choose the right business structure that aligns with your goals, preferences, and tax obligations. Remember, the decision you make now can have significant implications for your business's tax situation in the future.

Filing Business Taxes

Now, let's really dive in — how do you actually go about filing your business taxes? Here's a simplified rundown:

1. Choose Your Business Structure: Your business structure will determine how you file your taxes. Whether you're a sole proprietorship, partnership, corporation, or LLC, there are specific forms and requirements you'll need to adhere to.

2. Gather Your Documents: Be sure to gather all necessary documents, including (but not limited to) income statements, expense receipts, and any other relevant paperwork.

3. Fill Out the Forms: Depending on your business structure, you'll need to fill out different tax forms. This could include the IRS Form 1040, Schedule C, or various corporate tax forms. 

4. Submit Your Return: Once you've completed your forms, it's time to submit your tax return. This can typically be done online or by mail, depending on your preferences.

Staying Compliant with Business Taxes

Now that you've filed your taxes, the work isn't over just yet!  Staying compliant with business taxes requires ongoing attention and diligence:

• Keep Detailed Records: Maintaining accurate records of your income and expenses is crucial for staying compliant with business taxes. This includes receipts, invoices, bank statements, and any other relevant documentation.

• Stay Up to Date on Tax Laws: Tax laws are constantly evolving, so it's essential to stay informed about any changes that may affect your business. This could involve consulting with a tax professional or staying abreast of updates from the IRS and other regulatory bodies.

• Pay Your Taxes on Time: Missing tax deadlines can result in penalties and interest charges, so be sure to pay your taxes on time to avoid serious repercussions.

How Justworks Can Help

Even if you’re able to understand the basics, staying up to date and compliant with business taxes is still a chore. This is where Justworks is a game-changer. By partnering with Justworks, you can offload the burden of tax compliance onto experts who know the ins and outs. Justworks Payroll can assist with your employment-related payroll needs whether you’re just starting your journey or making moves to scale and grow. With Justworks by your side, small business owners can navigate taxes with confidence and peace of mind. Get started today!