5 Types of Business Taxes (And Why Your Business Structure Matters)

In running your own business, there is no shortage of things to keep up with. Sales…revenue…expenses…payroll…regulations…there is no shortage of things to keep you busy. Many of those things can also cause quite a bit of stress at times.

But nothing sends a shiver down a business owner’s spine quite like one word…taxes.

Then there’s the stress of keeping up with several types of business taxes!

In today’s post, we’ll help simplify the types of taxes you’re required to pay as a business owner as well as how different business structures can impact your company’s tax burden.

As CPAs who have been doing this for over 40 years now, we know a thing or two about taxes, and we’re happy to help guide you through it all. So read on and let the worry melt away!

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Types of Business Taxes

The IRS mandates 5 basic types of business taxes. Not all businesses end up paying all of these, but they are:

1. Income Tax

All businesses are required by law to file an income tax return every year. How your business is structured (more on that in a minute) determines what forms you use, but everyone has to do one.

2. Estimated Income Tax

Individuals who are employees typically have their income tax withheld throughout the year through a “pay-as-you-go” method. Businesses, however, usually make quarterly payments to the IRS based on what they expect their income tax for that year to be.

Individuals can use IRS Form 1040-ES to estimate their taxes. Corporations use Form 1120-W. (See the IRS page on Estimated Taxes for more information.)

3. Self-Employment Tax

All individuals who work for themselves must pay self-employment tax (a way of paying into Social Security and Medicare) if they earn over $400 or receive wages above $108.28 from a church or other related organization that allows them to be exempt from those taxes.

(See the IRS page on Self-Employment Taxes for more information.)

4. Employment Taxes

If you have people on your payroll, you are required to pay a certain amount of employment taxes on their behalf. You take on the responsibility for filing and paying:

  • Social Security and Medicare
  • Federal income tax
  • Federal unemployment tax

(See the IRS page on Employment Taxes for more information.)

5. Federal Excise Tax

Do Forms 720, 2290, 730, and 11-C sound familiar? Thankfully, for most small business owners they don’t…and they don’t need to. However, if you operate certain kinds of companies, make or sell certain kinds of products, use particular types of equipment or facilities, you’d better have those forms in order.

(The IRS has complete details on Excise Taxes here.)

That’s a lot to remember!

The federal government has put together several helpful pages on Business Taxes at their USA.gov site. You can dig a lot deeper there.

Also, that is just Federal taxes. There are also state and local taxes with which most businesses have to contend.

We get it! It can be hard to keep up with everything you need to remember throughout the year when it comes to taxes. One of the biggest mistakes you can make is to fall behind! When things pile up, it only makes filing your taxes tougher.

That’s why we created a free Tax Calendar…a simple PDF that you can download and use to help you stay on track!

Yes! I Want My Free Tax Calendar!

Different Business Structures

As we mentioned earlier, the way you choose to structure your business can determine quite a bit about how your company will pay taxes. There are 4 basic business entities you can choose from:

1. Sole Proprietorship

This is the easiest type of business structure to form since you don’t have to do anything other than make money providing goods or services. Unless you specify otherwise, the IRS considers you a sole proprietor. You’d file income taxes for your business as a part of your personal return. Under this category, your business and personal assets are not separate and you can personally be held responsible for any liabilities.

2. Partnership

When a business has multiple owners, they often choose to form a partnership as a simple way of structuring their company. This is common among professional groups such as doctors, lawyers, and accountants. There are two types:

a. Limited Partnership

There is one owner who has “unlimited” liability (can be held personally responsible for business debts and liabilities), and all other partners (co-owners) have “limited” liability (their personal assets cannot be affected).

b. Limited Liability Partnership

All owners enjoy limited liability protection from company debts as well as the actions of the other owners. (If partner A does something illegal, partners B, C, & D cannot be sued if they were not involved.)

3. Limited Liability Corporation (LLC)

This is the most popular way of incorporation when business owners decide to move beyond sole proprietorships or simple partnerships. It is a blend of partnership and corporation structuring.

With an LLC, the owner(s) of the company cannot have their personal assets affected by the debts or lawsuits of the business. If your business is in an industry with a high risk of litigation or if you have significant personal wealth, an LLC is a good choice.

4. Corporation

This is the most complicated business structure, and is usually found among larger companies. A corporation is considered a separate entity from its owners and can legally be treated the same way any individual would be.

They can raise money by selling shares of the company publicly if they want to. They also make it easy for “owners” to come and go without disrupting the overall structure of the business. Corporations are taxed on their profits and are often taxed twice: once when the profit is realized, and again when distributions are made to its shareholders.

Three main types of corporations are:

  1. C Corp – The default version of a corporation that operates as described above.
  2. S Corp – Profits from the company can be passed through to owners, thereby avoiding double taxation. The IRS has fairly strict guidelines for forming an S Corp, so not every business qualifies.
  3. Nonprofit – While not often thought of as a corporation, a nonprofit organization functions just like one. The only difference is that the profits they generate go back into the organization instead of out to shareholders. They enjoy tax-exempt status because their work generally benefits the public in some way.
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We’ve Got All Types of Taxes Covered

Our team of tax experts has been guiding our clients through the complicated maze of business taxes for decades. We know taxes inside and out, and work hard to stay on top of ever-changing regulations.

For some extra tips, check out a couple of other posts we’ve done:

We understand how important it is as a business owner to have your taxes done right. And we believe you deserve to expect more from your CPA.

Whether you’re looking for basic tax prep advice, help in setting up limited company tax advantages, or tax-efficient contractor solutions, we’ve got you covered.

Schedule a call with our tax team today to discover the CRS CPA difference!

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