“Why are tax laws so confusing?” We get that question a lot! With all of the different types of businesses, industries, and situations, the tax code can be a bit baffling! We’ve broken down the major types of taxes for businesses and the different situations in which you may need to pay. Need help? Practical Accounting Solutions is here and can help you decipher the tax laws to get the most out of your taxes!
The Basics
Let’s break down the most common types of federal taxes you’ll pay. These include income tax, estimated tax, self-employment tax, employment tax, and excise tax. You’ll need to pay some of these only if you apply to certain circumstances. Practical Accounting Solutions can help you make sense of how these apply to your business and your circumstance!
Income Tax
Unless you’re in a partnership, every business needs to file an annual income tax return. If you’re a partnership, you’ll file an information return. Depending on the type of business you are, your income tax form will look a bit different! Income tax can also be viewed as a pay-as-you-go tax where you pay it off as you earn revenues. Paying this tax commonly comes in the form of withholding part of employee pay. If you don’t withhold, or if you don’t withhold enough, you’ll be subject to estimated taxes.
Learn more about income tax here.
Estimated Tax
You’ll pay this if you don’t withhold, don’t withhold enough, or if you receive income in the form of interest, dividends, alimony, self-employment income, capital gains, prizes or awards. You can use this balance to also pay toward income tax, self-employment tax, and alternative minimum tax. If you don’t pay enough through combined withholding and estimated tax, you’ll be charged a penalty.
Who Pays
If you expect to owe $1,000 or more when your return is filed:
Individuals
Sole Proprietors
Partners
S Corporation Shareholders
Or, if you are a corporation and you expect to owe $500 or more when your return is filed.
Or, if your tax was more than 0 in the prior year.
There are a lot of "or"s here, but that just goes to show how nuanced the system is!
Who Doesn’t Pay
You can ask your employer to withhold more taxes from your earnings by filling out a new W-4 form if you receive wages or salaries.
If you fall under all three of these conditions, you also will not be liable:
If You Have No Tax Liability from the Prior Year
If You Were a U.S. Citizen or Resident for the Whole Year
If Your Prior Tax Year Covered a 12-Month Period
Estimated Taxes can be tricky. If you’d like to see more about qualifying, check out Publication 505 (2019), Tax Withholding and Estimated Tax
How Do I Calculate
Check out this Form 1040-ES if you’re an individual, sole proprietor, partner, or S Corporation shareholder. You can also calculate your gross income, taxable income, taxes, deduction, and credits to get a better idea of how much you might owe.
Self-Employment Tax
Self-Employment tax is particularly important because it contributes to your Social Security and Medicare. The tax rate is 15.3%, and you must pay a self-employment tax if your self-employment net earnings were $400 or more. If you work for a church or church-controlled organization that is tax-exempt, you’ll pay this if you receive $108.28 or more in wages and are not a minister or member of the religious order. You can also deduct the employer-equivalent portion of your self-employment tax when you calculate your adjusted gross income, but note that this only affects your income tax, not your net earnings from self- employment nor self-employment tax.
There are more specific rules for certain situations such as:
Caregivers
Aliens
Fishing Crew Members
Notary Public
State or Local Government Employees
Foreign Government or International Organization Employees
See here to view these circumstances in more detail
Employment Tax
Your employment tax goes toward funds like social security and Medicare, your Federal income tax withholding, and your Federal unemployment (FUTA) tax.
The IRS has created this calculator to figure your employment tax: Click HERE to calculate your employment tax
Self-Employed Employment Tax
If you’re self-employed, you’ll have to pay both the self-employment tax and income tax. Self-employment tax is similar to income tax in that it is withheld from your wages. You can get an idea of this based on your net profits or losses. To calculate net profits/losses, use the following equation:
Revenue - Expenses = +/- Profit
You’ll need to file if you earn $400 or more, but you also need to file if you fall under these special categories. You’ll also need to likely file an information return, too.
There are deductions you may qualify for like the Home Office Deduction.
Excise Tax
Last but not least, you may have to pay excise tax if you manufacture or sell certain kinds of products, use certain types of products, or operate certain types of businesses. Some examples of these operations include:
Sports wagering
Gasolene or Fuel
Aircraft Management
Indoor Tanning
Form 720 is a list of different types of taxes you might need to pay depending on your situation. These taxes include:
Environmental
Communications & Air Transportation
Fuel
First Retail Sale of Heavy Trucks, Trailers, & Tractors
Certain Manufacturers Taxes
Form 2290 pertains to taxes regarding certain types of vehicles with a gross weight of 55,000 lbs or more like:
Trucks
Truck Tractors
Buses
Form 730 and the Occupational tax and registration return for wagering regard taxes for wagering pools or lotteries.
Conclusion
Even though these were just the basics, it’s a lot of information to take in! This is one of the many advantages of working with a firm like Practical Accounting Solutions. We can help you make sense of your tax situation and find your deductions to help save you money! Reach out to us today for an appointment.
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Disclaimer: The views presented in this post are meant as educational resources and should not be taken as direct advice for your personal finances or small business. Should you have questions regarding a post relating to your specific finances, please contact us at info@practicalaccountingva.com.