Small business taxes explained: everything you need to know

Choosing the right legal structure

When you start a small business, you need to be aware of the different legal structures, because they each have different tax implications.

Which one will suit your company and your business plans?

Here are the different structures: 

• Sole proprietorships. This is the most common business type, where you operate an unincorporated business and you’re the sole owner.

  It’s simple to set up and manage, and taxation is also straightforward, as you report business income and losses on your personal tax return — Form 1040 

• S Corporations. This structure allows you to pass income tax to shareholders and avoid the problem of double taxation, where you’re taxed on a business tax return and again on your personal income once after-tax profits are distributed.

  This is a popular structure, because it allows for a traditional corporate structure, with up to 100 shareholders, but with more tax flexibility 

• C Corporations. Here is the traditional corporation structure, with shareholders, a board of governors, directors and employees.

  Being a C corp creates a level of credibility for investors and clients, as it’s often associated with larger companies, and it allows you to raise capital faster and target bigger contracts.

  As a C corp, you must pay tax at the company level — currently 21 per cent — and this structure also attracts double taxation, which puts off many small business owners starting up 

• Limited Liability Companies [LLCs]. The two main advantages here are no double taxation and deductible business losses.

  You are only taxed once, as an individual, much like a sole trader or an S Corporation: it’s called a ‘pass through’ tax approach.

  With an LLC you can also have an unlimited number of members or potential shareholders, which gives you huge potential to raise capital and grow 

Step one and types of taxes

The first thing you need to sort out, right when you register your new business, is an Employer Identification Number [EIN].

This is your federal tax ID number. You can find out all about your EIN here:  

As a small business, you need to understand a range of business tax types, so here we cover the key taxes.

As a small business, you need to understand a range of business tax types, so here we cover the key taxes. 

• Income Tax. Almost all businesses must file and pay federal taxes on income earned during each year. Most states impose a business or corporation tax, and each has its own tax laws. 

  Find out about the business tax requirements here:  

• Annual Information Return. If you’re in a partnership you don’t pay income tax, but instead file an Annual Information Return, where you report your share of any profit or loss from the partnership for the year 

• Self-Employment Tax. When you own a business, you need to pay Social Security and Medicare taxes, to ensure that you’re covered by the Social Security system 

• Employment Taxes. If you employ people, there are tax requirements for what you must pay and the information you need to file.

  Employment taxes include Social Security and Medicare, Federal Income tax withholding, Federal Unemployment [FUTA] tax and unemployment insurance taxes. 

  FUTA ensures that people receive unemployment benefits if they lose their job 

• Excise Tax. You pay this tax to the federal government when you make or sell certain products.

  You can find more out about federal excise tax here.  

• Property Tax. Every state has its own definition of taxable property. Some collect property tax on businesses in commercial real estate locations, while others collect on vehicles, computer equipment and a further range of business assets.

  The amount you pay is connected to the value of the property, or a percentage of this value.

  You can find out more about property tax in your state here. 

• Sales and Use Tax. You may find that your state taxes the sale of goods and services. Exclusions to this type of tax can include food, clothing, medicine and utilities.

  If you buy in goods and services from outside the state where you do business, you could be taxed on these too.

  Check whether your business has to register for sales tax here. 

• Estimated Tax. This type of tax is paid on income that is not subject to withholding, or if your federal income tax that’s being withheld won’t cover what you owe.

  You can discover more about estimated tax, whether you will need to pay it and how to proceed here

Key takeaways

There’s a lot to get to grips with when you’re running a small business, and all the different tax liabilities and laws can seem daunting.

However, if you follow the steps and links in this guide and do a little homework, you can get prepared and then concentrate on what you do best — building a great business. 

*This article is for information purposes only. For financial advice, talk to a regulated financial advisor.