Business taxation explained

By Katie Martens

Taxes are like the GoFundMe page for local, state, and federal governments. Taxes are how the governments at every level continue to operate, and how public benefits like roads, law enforcement, and waste management are provided.

In an over-broad way, I think of taxation as government receiving half a penny of every dollar earned. Even if my math is wrong, if you are earning or profiting off a service or good you provide, you should be paying a tax on that revenue. Individuals are taxed on their income, businesses are taxed on their income. Unfortunately, the United States has a complicated system of taxation, but this article is meant to illuminate the basics of business taxation.

If you own a business, and it’s a business that is legally registered with your state’s Secretary of State, you could lose your good legal standing if you fail to pay your local, state, and federal business taxes. The business structure you choose and the location of your business will have an effect on your business’ overall tax obligations.

Types of Tax Obligations

When this article refers to “local taxes,” it’s meant to refer to either the county or municipality where the business is. Typical local or state taxes usually include:

  1. Income taxes, and

  2. Employment taxes

Typical tax obligations for businesses at the federal level are:

  1. Income tax

    1. All businesses except partnerships must file an annual income tax return. Partnerships file an information return. The form you use depends on how your business is organized.

    2. Federal income tax is a pay-as-you-go tax. Your business must pay the tax as you earn or receive income during the year. An employee usually has income tax withheld from his or her pay.

  2. Self-employment tax

    1. Self-employment tax is a social security and Medicare tax primarily for individuals who work for themselves. Your self-employment taxes contribute to your coverage under the social security system. Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.

  3. Estimated tax

    1. Generally, you must pay taxes on income, including self-employment tax, by making regular payments of estimated tax during the year.

    2. If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax.

  4. Employer tax

    1. When you have employees in your business, you as the employer have certain employment tax responsibilities that you must pay and forms you must file. Employment taxes include:

      1. Social security and Medicare taxes

      2. Federal income tax withholding

      3. Federal unemployment (FUTA) tax

  5. Excise tax

    1. An “excise” is basically a tax on specific goods, services or activities. Whether or not your business will be subject to an excise tax depends on the goods, services, or activities your business provides, and whether your business is the manufacturer, retailer, or consumer of the goods, service, or activity. Here are some examples of current excise taxes:

      1. Superfund Chemical Excise Tax

      2. Excise tax on coal from mines located in the United States

      3. Kerosene used in aviation

      4. Sports wagering

      5. Heavy highway vehicle use tax

      6. Indoor tanning services

Business Structure

Business entities generally fall into 4 different categories:

  1. Sole Proprietorship

  2. Partnership

  3. LLC (Limited Liability Company)

  4. Corporation

Your business structure determines what kind of taxes you’ll pay at the local, state, and federal level. Let’s break it down with some charts:

Location

Different states and cities treat businesses differently, but the most common local and state taxes for businesses are income taxes and employment taxes. You’ll need to check with your CPA or consult your county and state rules to know what your business obligations will be.