July 07, 2020

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Business Taxes: What are they and how do you calculate them?

Business Taxes: What are they and how do you calculate them?

Getting on top of your taxes, whether personal or business, can relieve a lot of stress. In this article, we will give you a quick overview of common business taxes you will have to pay. Moreover, we will explain who has to pay them, when and how they are calculated.

Knowing what is required, you will feel more in control of your business finances. You will be able to properly plan for your tax expenses, including planning on how you can save and maximize your tax deductions and tax credits.

Income Taxes

All businesses (except partnerships) are obligated to pay annual income taxes on the money your business has generated. The form of business you operate determines the tax return you will file. The amount you will pay in federal income taxes will depend on the amount your business made (less expenses, deductions, etc.).

Unless you live in a state where there are no state or local income taxes, you will have to pay these on the income generated by your business as well. The amount you will pay will vary based on the location you live and other factors.

Estimated Taxes

Not everyone is required to submit quarterly estimated tax payments. By law, the IRS states that if you are estimated to owe more than a thousand dollars in taxes by year-end for your 1099 income, not your W-2, then you make quarterly estimated tax payments. There are four due dates for these:

  • April 15th
  • June 15th
  • September 15th
  • January 15th, following year.

There are several ways you can do it. You can mail it in, pay it over the phone, or you can pay it online. Paying online is a lot easier and a lot more secure. So, what do you pay and how much? There is a method you can use to avoid underpayment, and in turn, avoid penalties and interest, and at the same time not overpay and give the government an interest-free loan.

With this method, known as Safe Harbor Method, you would pay 100% of your prior taxes that were due. You are going to need your prior tax return and look at line 63 on page 2 of Form 1040. You will divide that number by four and pay that amount by the due dates mentioned above. If you have both 1099 and W-2 income, subtract out your W-2 withholdings for each quarter from your estimated payments.

Business Taxes: What are they and how do you calculate them?

Employment Taxes

As an employer, you need to pay half of the FICA taxes, and the other half is withheld from your employees’ paychecks. The FICA taxes are equal to:

  • 12.4% (Social Security portion)
  • 2.9% (Medicare portion).

As an employer, you will pay half of these taxes from your own pocket and half of these taxes you are required to withhold from your employees’ paycheck and pay on their behalf. In other words, you will have to pay 7.65% of your employees’ income in employment taxes. Also, you will have to pay federal and state unemployment taxes, but these are relatively small. To pay these taxes, you send Form 941 and a state equivalent. All the taxes are due by April 30th, July 31st, October 31st, and January 31st.

Self-Employment Taxes

Do you make more than $400 in freelance profit? Then, you need to pay the self-employment taxes. When you become self-employed, you are considered both the employee and the employer. Accordingly, you will have to pay both portions of that tax. The amount you pay is based on your net income, which is calculated slightly differently depending on what type of business entity you are.

It is also important to note that income taxes and self-employment taxes are not the same thing. You will pay both on all your freelance profits. To calculate and pay your self-employment taxes, fill out the Schedule SE of Form 1040. You will pay them on annual basis or quarterly if it is estimated that you will pay over $1K in taxes.

Excise Taxes

On most items you sell, the buyers will pay a sales tax, which is calculated as a percentage of the item price. On something like alcohol, however, the buyer will be charged an excise tax. An excise tax is a transactional tax where the buyer is charged by the unit, say 40 cents per bottle. While one can clearly see how much they paid in sales taxes, an excise tax often becomes part of the price.

If your business sells alcohol, cigarettes, fuel, and other items that are charged excise taxes, you should consider investing in a tax software that can account for the excise taxes. Note that the excise tax is not included in the selling price when the sales tax is computed. Each tax should be calculated separately on the actual selling price. Thus, if you also have sales taxes in your business, this software will need to be able to handle both of these. 

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Author: Charles Lutwidge

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