Business Income Tax
Every business except partnerships must file an annual income tax return, whether they are a small business, sole proprietor or large corporation. Partnerships instead file an annual information return since each partner reports profits and losses on their own individual tax returns. This is referred to as a “pass through” business, which is the dominant business structure in America. They are not subject to corporate taxes. Profits earned are “passed through” the business and reported on the business owners’ personal income taxes. This eliminates the two layers of taxes that corporations pay: one at the corporate level and one at the shareholder level. These businesses also pay self-employment taxes and state and local taxes. They include partnerships (LLCs), sole proprietorships and S corporations. Pass through businesses are not necessarily small businesses, but can employ thousands and generate billions in revenue.
The type of business determines the type and payment of taxes. How the business is organized determines the forms used. Most businesses need a Federal Tax ID Number or Employer Identification Number (EIN) for the identification and tracking of tax reports to the Internal Revenue Service (IRS).
The Federal income tax is paid as money is earned. This is known as paying estimated taxes. Not paying enough estimated taxes may require paying estimated taxes throughout the year, instead of quarterly. Businesses are not only responsible for paying income taxes, but other taxes as well: self-employment tax (if applicable), estimated taxes, Social Security and Medicare taxes, income tax withholding, federal unemployment tax (FUTA), and Excise Taxes.
Business tax credits, such as the use of environmentally safe fuels and the employer’s paying for the employees’ Family and Medical Leave, can reduce the amount of business income tax due. Prior years’ tax credits carried over to the current year in addition to the present tax credits will also reduce the amount of business income tax due. Business expenses must be a commonly accepted expense for the trade or business (ordinary) and one that is also helpful and appropriate (necessary) for the trade or business to be deductible. Not every expense incurred by a business can be deducted. Expenses such as office supplies or the purchase of raw materials in the manufacturing of a product can be deductible. The payment of income taxes is not deductible.
A self-employment tax (SE tax) is a social security and Medicare tax for those individuals who work for themselves. These payments contribute to the individual’s coverage under the social security system, which provides the individual with retirement benefits, survivor benefits, disability benefits and hospital insurance (Medicare) benefits. The following individuals must pay the SE tax and file the corresponding form if:
Businesses must also pay certain employment taxes if they have employees:
Excise taxes are due if the business does any of the following:
Excise taxes consist of several broad categories of taxes including environmental taxes, fuel taxes, manufacturers taxes on the sale or use of a variety of different articles, communications and air transportation taxes, and taxes on the first retail sale of heavy trucks, tractors and trailers. A federal excise tax applies to vehicles with a taxable gross weight of 55,000 pounds or more such as certain trucks, buses and truck tailers used on public highways. The federal excise tax is also imposed on airline tickets, tires, indoor tanning and tobacco. Excise taxes are filed quarterly. They may be imposed at the time of import, sale by the manufacturer or retailer, or when used by the manufacturer or consumer. This tax may be passed onto the consumer. These excise taxes are deposited into trust funds for projects that are related to the good or service, such as airport or highway improvements.
The payment of taxes occurs throughout the year in the form of withholding amounts from a paycheck or through the payment of estimated taxes. The improper reporting and/or payment of taxes can incur penalties and interest even if the business is owed a refund at the end of the year. Businesses and those who are self-employed must pay estimated taxes throughout the year. Individuals who receive salaries and wages do not have to pay estimated tax payments since their employer is withholding taxes from their earnings and paying it to the IRS and/or State throughout the year.
The calculation and reporting of business income tax can be very complex and complicated. Mistakes can be costly in both time and money. Hiring a tax expert can alleviate the stress and produce better results than attempting the process yourself. Call us today for expert assistance in determining the best options for you and your business. Visit our tax resolution page for more services.