When you’re a new business or a small business operating online, or mostly online, there can be a big learning curve. Something that possibly starts as a side hustle can become your full-time source of income.
With that comes freedom and flexibility, but also financial and legal responsibilities.
As a small business owner, understanding taxes is important.
Failing to pay your taxes or file them correctly can be a costly mistake. It can also lead to state or federal criminal charges.
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The following are some of the big things to know about taxes as a small business owner.
Do You Pay Taxes on a Small Business?
First, the simplest question—do you have to pay taxes on a small business?
The answer is typically yes.
You have to pay income tax, self-employment tax, and sometimes employee payroll and local property tax.
The specifics of what you pay depend on factors like your business structure, whether or not you have employees, and where you do business. Also relevant are whether your business is profitable and if you have any deductions that apply to your business.
All businesses have to file an annual income tax return.
Unless you’re structured as a C corporation, your business is considered a pass-through entity, meaning you’re taxed at the individual rate.
If you are self-employed, you have to pay Social Security and Medicare taxes. This would apply to you if your net earnings are at least $400 or work for a church or church-controlled organization.
If you have employees you have to pay employment taxes. These include Social Security and Medicare taxes, federal income tax withholding, and federal unemployment tax.
Pass-Through Entities
As was touched on, unless you’re a C corporation, you’re considered a pass-through entity. The tax rate for pass-through entities is the same as your personal income tax rate.
There is also an alternative minimum tax or AMT. The AMT applies only to some high-income earners who might otherwise not pay individual income taxes.
Pass-through entities include:
Sole proprietorship:
This may be what your online business is, particularly if you’re just starting out. You are the only owner, and you’re entirely responsible for everything.
If this is you, you need to set it up so that your personal and business finances are completely separated to avoid potential tax issues.
Limited and limited liability partnerships:
In these businesses, ownership is shared by two or more people.
Limited Liability Company:
An LLC is a common small business structure. When you set up an LLC, it can help you separate your personal assets from your business liabilities.
This reduces your personal risk.
Your profits and loss can pass throughout your personal income without you having to pay corporate taxes.
However, if you have an LLC, you have to pay self-employment taxes.
S Corporation:
An S corporation is structured to help you avoid the double-taxation of a C corp.
With an S corporation, some profits and losses can pass directly to your personal income without requiring that you pay corporate tax rates.
There are limitations to filing processes and operations.
State and Local Taxes
Where you live plays a role in the taxes you’re responsible for as well.
When it comes to state and local taxes there are state income taxes, property taxes, and sales taxes.
Some states don’t have a state income tax, but otherwise, you’ll have to pay them.
If you have a commercial property that you own, you’ll have to pay property tax.
Also, if you sell things, even through e-commerce only, you’re responsible for collecting sales tax.
This gets complicated for online businesses.
Some states charge sales tax based on where the seller is located. Other states base it on the buyer.
Finally, as a smaller business owner, you don’t pay the IRS once a year. You have to pay them four times a year, which is how things differ from when you pay as an individual.
There are four deadlines to keep up with, and then by the time the annual tax deadline comes, you’ve already paid three-quarters of what you owe.
You calculate your quarterly payment for your business taxes based on your anticipated adjusted gross income, as well as your taxable income, small business tax credits, and deductions.
If you’ve never filed small business taxes before, it can be worthwhile to consult with a professional to ensure you have everything in order.
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