Business Taxes 101: A Guide for Startups

As a startup, navigating business taxes can be a daunting task. You're not alone - many entrepreneurs struggle to understand the basics of business taxes.

The good news is that there are some key concepts to grasp. For example, you'll need to understand the difference between a sole proprietorship and a corporation, as this will impact your tax obligations.

A sole proprietorship is a simple and common business structure, but it also means you'll report your business income on your personal tax return. This can be a great option for small startups with minimal employees.

Most states require businesses to obtain an EIN, or Employer Identification Number, which is used for tax purposes. This is a crucial step in setting up your business, and it's usually free.

Filing Requirements can be a bit overwhelming, but let's break it down.

Small businesses typically use simpler forms like Schedule C for sole proprietorships or Form 1120-S for S-corporations.

These forms are often used because they're more straightforward and easier to understand.

Small businesses also need to make quarterly estimated tax payments to avoid penalties.

This means setting aside a portion of their income each quarter to cover their tax liability.

Some businesses may also need to file TeleFile, which allows them to file certain taxes electronically, such as Sales and Use/Direct Pay, Motor Fuels, Natural Gas and Crude Oil, and International Fuel Tax Agreement (IFTA).

Texas Franchise reports can also be submitted electronically with approved tax preparation provider software.

If you're a large business, you'll likely use more complex forms like Form 1120 for C-corporations.

You may also need to file consolidated tax returns for multiple subsidiaries, which requires more detailed reporting and compliance.

To make things easier, here are some common taxes that can be filed electronically:

Small businesses may be subject to various taxes on both the federal and local levels. These taxes may include income tax, employment tax, and excise tax, though every small business may not need to pay each of these taxes depending on where they are located and the nature of their business.

Income tax is a type of tax that is paid on the profits of a business. Employment tax, on the other hand, is a type of tax that is paid on the wages of employees. Excise tax is a type of tax that is paid on specific goods or services.

Some small businesses may also need to pay local taxes, such as property tax or sales tax. Property tax is a type of tax that is paid on the value of a business's property, while sales tax is a type of tax that is paid on the sale of goods or services.

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Small businesses may be subject to various taxes on both the federal and local levels.

Forty-five states, the District of Columbia, and many localities levy a sales tax.

You may need to register, collect, and remit sales taxes in more than one state or local jurisdiction.

The United States does not have a national sales tax.

Every small business may not need to pay each of these taxes depending on where they are located and the nature of their business.

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Income tax is a crucial aspect of small business taxation. All businesses, except partnerships, are required to file a federal income tax return each year.

Partnerships, on the other hand, must only file information returns (Form 1065) because partnership income is passed through to the partners, who are taxed on it individually. This means that partnerships don't pay federal taxes directly.

The type of tax return required varies depending on how the business is legally structured. Sole proprietorships file a Form 1040 or 1040-SR, along with a Schedule C, or Schedule F in the case of a farm business.

Individual partners in a partnership must file a Form 1040 or 1040-SR, as well as a Schedule E. The same is true of individual shareholders in S corporations.

C corporations and S corporations must file a Form 1120 or 1120-S, respectively. The 1120-S form is an information return, and the S corporation doesn't pay federal taxes but passes that obligation on to its individual shareholders.

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Here's a summary of the tax return requirements for different business structures:

Limited liability companies (LLCs) may be set up as partnerships, corporations, or as an entity disregarded as separate from its owner, which means the owner is taxed as an individual, much like a sole proprietor.

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Deductions and Credits can be a game-changer for small businesses. They can help reduce taxable income and even provide a dollar-for-dollar reduction in taxes.

The IRS offers a variety of deductions and credits that small businesses can claim. Among them are the home office deduction, startup costs deduction up to $5,000, and Section 179 deduction.

For example, the home office deduction can be a lifesaver for freelancers and remote workers. It allows them to deduct a portion of their rent or mortgage interest as a business expense.

Here are some popular deductions and credits:

Keep in mind that large businesses have access to more substantial deductions and credits, such as research and development (R&D) credits and foreign tax credits for international operations.

As a sole proprietor or individual partner in a partnership, you'll need to deal with self-employment tax for Social Security and Medicare.

The self-employment tax rate is 15.3%, which includes 12.4% for Social Security and 2.9% for Medicare.

You'll need to attach Schedule SE to your 1040 or 1040-SR form to report your self-employment tax.

This tax can add up quickly, so be sure to factor it into your business expenses and financial planning.

Small businesses can claim a variety of deductions and credits when they file their taxes.

Among the deductions available to small businesses are the home office deduction, startup costs deduction up to $5,000, and Section 179 deduction.

The home office deduction allows sole proprietors to deduct the cost of a home office that they use exclusively on a regular basis to run their business.

Large businesses, on the other hand, can leverage more substantial deductions and credits such as research and development (R&D) credits and foreign tax credits for international operations.

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Some of the tax credits available to small businesses include the Work Opportunity Tax Credit (WOTC), Employer-Provided Childcare Credit, Small Business Health Care Tax Credit, and Qualified Small Business Payroll Tax Credit for Increasing Research Activities.

Here are some of the tax credits mentioned:

The IRS doesn't have a set definition for what constitutes a small business, but it does refer to small businesses with assets under $10 million.

To qualify as a small business, you'll likely need to file Form 1040 or 1040-SR, Schedules C, E, F, or Form 2106.

The IRS defines small businesses as those that meet specific criteria, including having assets under $10 million and filing certain tax forms.

You can find more information on small business tax requirements on the IRS's Small Business and Self-Employed Tax Center webpage.

Here are some key characteristics of small businesses according to the IRS:

Keep in mind that these criteria are not exhaustive, and the IRS may have additional requirements for small businesses.

The IRS also provides resources for small businesses, including the Small Business and Self-Employed Tax Center and the Self-Employed Individuals Tax Center.

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As a small business owner, understanding tax rates and pay is crucial for financial planning. The type of business structure you have determines how you pay taxes.

Corporations pay a flat tax of 21% on business profits. This is a straightforward tax rate, but it's essential to note that corporations also have other tax obligations.

The tax rate for pass-through businesses varies depending on the owner's income level, ranging from 10% to 37%. This means that the tax rate will be determined on an individual basis.

The tax form you use also depends on your business structure. Here's a quick rundown of the most common tax forms:

As a business owner, understanding your tax obligations is crucial to staying on top of your finances. A small business pays taxes based on its income level and business structure, with corporations paying a flat tax of 21% and pass-through businesses paying taxes at the owner's income-based marginal tax rate, ranging from 10% to 37%.

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If you have employees, you'll need to pay employment taxes, which include Social Security and Medicare taxes, income taxes withheld from employee pay, and unemployment taxes. These taxes are filed using various forms, depending on the type of business and tax.

As a business owner, you may also need to make estimated tax payments if you expect to owe tax of $1,000 or more when your return is filed, unless you're a corporation, in which case the threshold is $500.

Payment deadlines are crucial to avoid penalties and loss of timely filing and/or prepayment discounts.

If you owe $1,000,000 or less, you must schedule your TEXNET ACH Debit payment by 10:00 a.m. (CT) on the due date.

Payments above $1,000,000 must be initiated in the TEXNET system by 8:00 p.m. (CT) the business day before the due date.

Late payments are subject to penalties.

If you're required to pay electronically, there's an additional 5% penalty for failure to do so.

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Franchise taxes can be a bit confusing, but I'll break it down for you.

All "No Tax Due" reports due after Jan. 1, 2016 must be filed electronically. This is a key deadline to keep in mind.

Roughly a dozen states impose a franchise tax on businesses of various kinds. This tax is not specific to franchises, but rather a type of tax levied on businesses in these states.

You'll need to check with the state you're operating in to see if they have a franchise tax. Some states may have specific requirements or exemptions that apply to your business.

If you're a business owner, it's essential to understand your tax obligations, including franchise taxes. This will help you stay compliant and avoid any potential penalties.

Excise taxes are a type of tax levied on specific goods and services, such as fuels, air transportation, and certain vaccines. They can be imposed by both the federal government and states.

Businesses that sell or manufacture products like alcohol, tobacco, and firearms are subject to excise taxes. This includes companies that operate sports wagering businesses.

The cost of excise taxes can vary widely depending on the good or service being provided. For example, the federal tax rate for international air travel is $22 per passenger for flights that start or end in the continental U.S.

Excise taxes are often embedded in the price of products and services and passed through to consumers. This means that the cost of these taxes is usually built into the final price of the product or service.

Some excise taxes are referred to as sin taxes, which are levied to discourage certain activities or make them more expensive. Most states impose an excise tax on cigarettes.

Businesses file their excise taxes on specific forms, such as Forms 720, 730, 2290, and 11-C, depending on what is being taxed.

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Employment taxes are a crucial part of your tax obligations if you have employees.

As a business owner, you're required to pay employment taxes if you have employees, which includes Social Security and Medicare taxes, income taxes withheld from employees' pay, and unemployment taxes.

If you're a sole proprietor, partnership, or C or S corporation, you're subject to employment taxes.

You'll file employment taxes using Form 941, 943, or 944, except for unemployment taxes, which are filed with Form 940.

Employers pay a portion of Social Security and Medicare taxes, as well as the entire amount of unemployment taxes.

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State and local taxes can be a complex and confusing topic, but understanding the basics can help you navigate your tax obligations.

Businesses are subject to various state and local taxes, including income taxes, property taxes, and franchise taxes.

Some states impose a franchise tax on businesses that want to do business in that state. According to the U.S. Small Business Administration, roughly a dozen states impose this type of tax.

Business owners also need to be aware of property taxes, which can be levied on buildings, land, or other real property. This can include tangible personal property, such as machinery, office equipment, or inventory.

Businesses that own property may be taxed on it at the state and local levels, just like individuals.

In addition to these taxes, businesses may also need to obtain licenses and pay fees to operate in certain states or localities. For example, states may regulate activities like auctions, construction, and dry cleaning.

Businesses may also pay income taxes at the state level, with 44 states levying a corporate income tax as of 2024. The rates range from 2.5% (North Carolina) to 9.8% (Minnesota).

Here is a breakdown of the states with a corporate income tax:

Individual income taxes are levied in 43 states, with top marginal tax rates ranging from 2.5% (Arizona and North Dakota) to 13.3% (California).

As a business owner, it's essential to understand who must pay taxes. Sole proprietors, partners, and S corporation shareholders must make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.

If you're a corporation, you'll need to make estimated tax payments if you expect to owe tax of $500 or more when your return is filed. This is a crucial consideration, as failure to make these payments can result in penalties and interest.

You'll also need to pay employment taxes if you have employees, which includes Social Security and Medicare taxes, income taxes withheld from employee pay, and unemployment taxes.

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When choosing an entity structure for your business, it's essential to understand the benefits and drawbacks of each option. Small businesses often opt for sole proprietorships, partnerships, LLCs, or S-corporations, which offer benefits like pass-through taxation.

These structures also involve personal liability considerations, which can be a significant concern for business owners. Personal liability means that your personal assets, such as your home and savings, are at risk if your business is sued or incurs debt.

Large businesses, on the other hand, frequently operate as C-corporations, which may face double taxation at both the corporate and shareholder levels. This can result in a higher tax burden for the business and its owners.

You've got options for filing and paying your business taxes, depending on what type of taxes you need to file. If you need to file taxes like Sales and Use, Franchise, or 911 Fees, you can use Webfile.

You can also use EDI to file taxes like Sales and Use/Direct Pay, Motor Fuels, Natural Gas and Crude Oil, or International Fuel Tax Agreement (IFTA).

As a small business owner, the way you pay taxes depends on your business structure. If you're a C-corp or LLC taxed like a C-corp, you'll report business income and expenses on Form 1120. If you're an S-corp or LLC taxed like an S-corp, you'll report business income and expenses on Form 1120-S and issue a Schedule K-1 to each shareholder. If you're a partnership or LLC with multiple members, you'll report business income and expenses on Form 1065 and issue a Schedule K-1 to each member. If you're a sole proprietorship or LLC with only one member, you'll report business income and expenses on Schedule C and file it along with your individual tax return, Form 1040.

If you have no taxable sales to report, you can file by phone with Webfile. Texas Franchise reports may be submitted electronically with approved tax preparation provider software, which you can view on the official website.

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If you're required to report electronically, there is an additional 5% penalty for failure to do so. This means it's crucial to file on time and electronically if needed.

You can file electronically with Webfile, EDI, or a approved tax preparation provider software. For example, Webfile allows you to file Sales and Use, Franchise, and 911 Fees taxes, while EDI is best for Sales and Use/Direct Pay, Motor Fuels, and International Fuel Tax Agreement (IFTA) taxes.

If you have no taxable sales to report, you can file by phone with Webfile. However, if you're required to report electronically, there's a 5% penalty for failure to do so.

Here are some taxes you can file electronically:

Make sure to file on time, as late returns may be assessed a $50 late filing penalty. Returns filed with Webfile must be submitted by 11:59 p.m. Central Time (CT) on the due date.

Estimated taxes are a way of paying other taxes throughout the year, not separate taxes in their own right. This means you'll need to file them quarterly rather than annually.

Sole proprietors, C corporations, and S corporations, as well as individual partners in partnerships and individual shareholders in S corporations, may all need to file estimated taxes.

You'll use either Form 1040-ES for individuals or Form 1020-W for corporations. Failure to pay estimated taxes, or to pay enough in total, can result in underpayment penalties once you file your annual tax return.

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