Joe Entrepreneur has been in business for just a few months. He visited a professional tax preparer for a consultation. He thinks he’s paying too much in taxes already. He tells the tax preparer that he’s been paying sales taxes on a timely basis. The tax preparer tells Joe that sales taxes are not income taxes and asks Joe what he’s doing about his income taxes. Joe is really confused. He thought he only had to pay sales taxes. Joe is really worried, he asks himself “How am I going to pay for all these taxes?”.
Like Joe Entrepreneur, many small business owners are misinformed when it comes to taxes. There are many different types of taxes that businesses and individuals pay. I’ll go over some of them:
A business pays different kinds of taxes:
Income Taxes:
- Federal income taxes to the IRS (depending on the business structure selected)
- State income taxes to the states where the business is doing business
- State income tax rules vary from state to state – some states don’t have a state income tax on corporations or businesses
Sales taxes and use taxes:
- Collected by the seller on taxable sales and services provided within the seller’s state
- Sales and use taxes are paid to state and local authorities
- Sales taxes are not considered “income” taxes. You collect sales taxes from the buyers that reside in your state and you submit the sales taxes collected to your state
- You register to collect sales taxes with your state (not the IRS). Rules vary from state to state regarding what items or services are taxable. If you are unsure you need to contact your State’s “Department of Revenue.”
Payroll Taxes:
- Paid to the IRS and the state where the business hires employees (this applies only if the business is paying employees)
- Payroll taxes are not considered “income” taxes
An individual (a person) pays different kinds of taxes:
- Federal income taxes to the IRS
- State income taxes to their state (if the state has an income tax)
- Self employment taxes to the IRS for certain business earnings
I’ll share more details on each of these types of taxes in future posts. What do you want to know about small business taxes? Leave a comment.