Common Types of Business Taxes: What You Need to Know
Running a business isn’t all cash and roses. You also have to deal with thorns, like taxes. And just like there are many varieties of businesses, there are many varieties of taxes.
I get it – these thorny taxes are complicated. Just figuring out what to pay every quarter can seem overwhelming. But, tax season never ends. When you add in the other tax types, you might feel like you’re drowning in forms and calculations.
Fortunately, there are plenty of ways to make it easier on yourself. In this guide, I’ll talk about the most common types of taxes. I’ll cover the basics of each type and give you some great tools, like apps and systems, that can give you peace of mind.
Sales tax
Sales tax is probably the most well-known business tax, but it’s incredibly complex. I don’t say that to scare you. There is no one federal sales tax law. Instead, it’s managed by states and local governments. Here’s what you have to contend with:
45 states & DC charge sales tax
38 of which also have local sales taxes
Over 15,000 sales tax jurisdictions
14,000+ law changes every year
It’s bad. Even 52% of in-house accounting professionals think it would be easier to run a marathon than to understand their employer’s sales tax situation!
Your sales tax obligations depend on what you sell, where you are, and sometimes where your customers are. Figuring it out can be extremely time-consuming. For each service or product you sell, you need to figure out whether it’s taxable in your state. If so, you’ll need to register with your state’s tax department to get a sales tax permit.
Some states require you to register and file reports even if you don’t sell anything that’s taxable. For instance, in California, you’ll need to get a seller’s permit if your sales are over $100,000 per year, even if you don’t have to charge sales tax!
Once you have your sales tax permit, you’ll have to charge your clients sales tax on their purchases. Then monthly, quarterly, or annually, you’ll need to remit that money to the state.
Online sales are even more complicated. You could potentially owe sales tax everywhere you have customers. Most states made serious changes over the last few years.
So how do you keep track of all your sales tax responsibilities? How do you know if you’ve sold enough to clients in other states that you’re obligated to pay sales tax there? What exactly do you need to file? How much do you owe? And where are you supposed to send the check?!
Fortunately, there are apps that handle all those headaches. My favorite is TaxJar, which automatically keeps track of all the sales tax laws and integrates with payment processors and e-commerce tools to charge customers the right amount of sales tax, file the necessary reports, and remit sales tax to the state(s). Plus, TaxJar tracks your sales by state and will tell you when you’re getting close to having to pay sales tax there.
Use Tax
Another tricky one is use tax. This is related to the sales tax, however, it’s a tax you charge yourself. It comes up often in audits.
You owe use tax when you buy an item from an out-of-state vendor and they don’t charge you sales tax. In this case, you’re supposed to charge yourself the sales tax, report it, and remit it. This is also why it’s incredibly important to save your receipts so you prove if you did pay any sales tax.
Use tax is something that’s very common nowadays in the Internet Age. Any huge company, like Amazon, and marketplaces, like Etsy, will charge you sales tax. You need to pay extra attention to the smaller sellers. If you buy an item that’s taxable in your state and the receipt does not show sales tax, you need to charge yourself use tax.
When you file your sales taxes, you should report these non-taxed items and pay the proper use tax.
Income taxes
Income taxes are what most people think of when I say “taxes.” It’s generally the biggest tax bill people owe each year. This tax is how the federal and many state governments are funded.
All US workers and US citizens abroad pay income taxes. It gets complicated when we look at businesses and business owners. Unless you are a C-Corporation, your business does not pay federal income taxes (some states vary, but most mimic the Federal government’s). In most legal structures, including sole proprietors, LLCs, s-corporations, and partnerships, the income will “pass-through” to the owners who will report the income on their personal income tax return.
In a future blog, we’ll go through the main parts of income tax and how to pay it. For now, you should know two things. First, the most common way to pay these taxes is via estimated tax payments or through payroll. Second, there’s another tax type called self-employment tax that is bundled in with income tax.
Property taxes
No tax is pleasant, but property taxes are, in my humble opinion, the most annoying. These taxes are usually charged by your local government, like your city or county. They are based on the physical things you own and even the supplies you use for business.
You may be thinking about big things like buildings, vehicles, equipment, and expensive technology. All of these things can be eligible for property taxes. But the government can also charge taxes on small things: laptops, supplies, and handheld tools. Even if you use some of these things for personal tasks, if you use them for business also, they can be taxed.
Because property taxes are charged by the local government, the payment deadlines could be anywhere on the calendar. In addition, property tax audits are common, so be sure to keep those receipts!
Other miscellaneous taxes
Depending on what kind of business you run and the state where you’re located, you may be responsible for other types of taxes. Other tax types include:
Occupancy tax (hotels)
Excise taxes (sales of alcohol, tobacco, and firearms)
State business fees (e.g. California’s annual LLC fee)
Tourism tax (amusement parks)
This list is not all-encompassing. Every state has obscure taxes, so be sure to do your research or speak with a professional.
Simplify your business taxes
Business taxes are complicated, and most entrepreneurs don’t have the time or desire to keep track of all the calculations and deadlines. If you are worried about missing important deadlines, I can help!
My Biz Wellness Plan is designed to help you create an effective, efficient system for your business finances. With this plan, you can stay on top of your taxes and feel confident that you’ve got the admin side of your business under control.
Don’t forget another tax deadline
This plan will help you track your financial and tax to-dos, so you’ll never be blindsided by a tax payment you didn’t expect again