Taxes You Pay as an Entrepreneur: A Comprehensive Guide

Starting a new business or running a small business comes with responsibilities including filing both personal & business income taxes & understanding what types of deductions you can take.

Taxes You Pay as an Entrepreneur: A Comprehensive Guide

Starting a business or running a small business comes with a lot of responsibilities, including filing both personal and business income taxes. In the United States, the qualified business income deduction (QBI) can help lower your taxable income. Transfer companies, such as entrepreneurs, can deduct up to 20% of the QBI. Income taxes and self-employment taxes (Social Security and Medicare taxes) are based on your company's net income during the tax year. This is the same as profits (income minus expenses).

If you share a business with others, the net income is divided between or among the owners, depending on their agreement. Self-employment taxes are those paid by sole proprietors, partners in a partnership, and owners of an LLC. This tax is for Social Security and Medicare and is based on the company's net income. You must calculate self-employment taxes using Schedule SE and add the total of this tax due to your personal tax return. If your company has no net income for a year, it means that there is no tax due on self-employment.

It also means that you won't receive Social Security or Medicare credits for that year. Business owners are shareholders; they are not self-employed. Owners of joint stock companies are not considered to be self-employed and therefore do not pay taxes on self-employment. Because you're a business owner, no one withholds income tax or self-employment tax from the money you withdraw from the business. Remember that you don't get a check because you're not an employee. The first payment of the year is due on April 15 and, again, on June 1.The estimated tax form for business owners combines business and personal income and taxes, including self-employment taxes.

Companies don't directly pay sales tax on the products and services they sell. However, if your business operates in a state that has state income taxes, you must set up a system to collect sales tax from your customers and report and pay that tax in your state. Federal income taxes are due annually, but estimated taxes are paid quarterly, and federal employment taxes must be paid monthly or twice a month, depending on the payroll. The specific due dates for federal income taxes, estimated taxes, and payroll taxes may change each year, depending on weekends and holidays. If the tax due date is a weekend or holiday, the date is usually the next business day.

The IRS has an online tax calendar to help you determine the exact dates of the current tax year. Each type of federal tax has penalties for not reporting or not paying, including income taxes and employment taxes. Penalties can be charged for not filing returns and reports on time, for filing inaccurate returns, and for not paying enough taxes. A common mistake small business owners make is forgetting to declare and pay enough estimated taxes to cover both business income taxes and the owner's self-employment tax, resulting in an underpayment penalty. Dividends are not considered earned income and you must pay a special tax rate on the dividends you receive through your personal tax return. Transfer business owners must make estimated tax payments, which are generally due on April 15, June 15, and September 15. Some states impose a gross income tax on businesses instead of, or in addition to, a state income tax.

Companies pay dividends to their shareholders, and then shareholders must pay taxes on those dividends in their individual tax returns. Most small businesses are transfer entities, meaning that profits or losses are transferred to homeowners on their personal income tax returns. A corporation's income is taxable, and any distribution of income to individual shareholders known as dividends is subject to tax a second time as ordinary dividend income. Excise taxes are paid by a company for certain types of use or consumption such as fuel or other activities such as transportation and communications. Calculating the QBI starts with a company's profits but it must be adjusted to account for certain compensation payments to the owner, taxes on self-employment, and many other types of income and deductions.

Most small businesses pay state income taxes on business income through their tax returns similar to federal income taxes. Collecting taxes in every state wouldn't present major difficulties but since this isn't the case your company will need to identify tax-exempt sales from taxable sales. If your business owns real estate such as a building you must pay property tax to the local tax authority which is usually the city or county where the property is located. You must declare the amounts due and paid for these taxes each quarter and make regular payments depending on the size of your company's payroll. However many newly-created business owners may feel apprehensive about filing taxes for the first time. States and many local governments collect excise taxes on various products and services such as gasoline tobacco and gaming activities. Filing your first set of business taxes can be intimidating but understanding what types of taxes you need to pay can help make it easier.

Knowing what types of deductions you can take can also help reduce your overall taxable amount so it's important to do research before filing your return.