Everyone pays taxes, especially small business owners. This money finances roads, schools, healthcare, infrastructure, etc., and if you're a small business owner, you should pay your small business taxes on time.
Business tax preparation is crucial for self-employed and small business owners. Any small company should keep exact books and record all income and expenses, keeping in mind possible grants or tax deductions. We have prepared a short guide on how to get organized, keep track of the right information, and avoid expensive mistakes.
Remember, though, that the tax laws are different in each country, and in each state in the US (or even county!) the business tax rules below might differ slightly. If you have any questions, ask the local tax office or accounting consultant.
What taxes do you have to pay?
How much do small businesses pay in taxes? Depends on the state and the country, but in the USA it’s on average 20%, and 13% for sole proprietors. However, there are various sorts of taxes.
Nearly every state in the USA has its own business and corporate income tax, apart from the federal business tax laws. You also typically have to pay unemployment insurance for your workers. Most workers demand medical coverage, which in the USA is often privately run and paid separately. In the EU, payroll taxes are typically separate expenses that are tax-deductible.
Most US states also have a sales tax (sometimes called VAT, in the EU and in some US states). The business owner must collect, report, and pay this tax on every good or service delivered in a state where you offer your wares. However, this is the real issue: in the US, tax rates and regulations vary wildly.
There are states and counties with 0% VAT like Delaware and Montana, counties where sales of alcohol are under a higher tax rate, and so on. Local cities and counties can have their own extra sales tax. On top of that, some states charge Internet sales tax. However, the average sales tax rate in the US is rarely above 8%, compared to 20–30% in the European Union! The US is on the list of the best countries to start a business - and so are many European countries, though for different reasons. Business tax preparation must involve learning the local tax regulations—and ones in neighboring areas.
If you’re a larger company, you also have to pay the property tax. This can include real estate taxes and taxes on large property, like business equipment. However, scientific research or medical equipment can be tax-deductible (again, depending on the state). Depending on your industry, you might also have to pay excise taxes, custom duties, franchise taxes, and so on.
Get an accountant
One of the best ways to get your taxes in order is to hire an accountant. A certified public accountant (CPA) will organize your expenses, help you with invoicing, record your income, and inform you about your local small business taxes and laws of taxes. This person can also help you in extending the business tax deadline – 2022 was hard for many small businesses, and tax day might be extended in your state or country.
Don't assume that you can personally settle taxes for your small business. One of the biggest mistakes small business owners make is settling their own business taxes. You don't know about all the deductions and tax laws that apply to small businesses, but you are still responsible for paying your taxes on time.
You can hire an accountant full-time (typically, the accountant is the first employee hired by many start-ups), use one part-time, or ask for a one-time consultation to explain how to do business taxes. As usual, the cost depends on your country, US state, or even the city. You can learn more about accountancy in our guide here.
Obtain an EIN
An EIN is your tax ID for business. EIN stands for Employer Identification Number - you need to apply to the IRS if you are registering your company, using Form SS-4. You can also apply for an EIN online using the IRS website.
Are you a freelancer?
If you have done a side hustle or started freelancing, the IRS considers you a small business. This means you should report every dollar you make, since it counts as self-employment. Again, the exact tax depends on the state, but you should assume that 30% of income after deducting business expenses would be enough.
If you are self-employed and make more than $400 a year, you have to pay Social Security and Medicare taxes. If you work for wages, your employer can cover that, but if you are your own boss, you need to use Form 1040. Find the correct forms and use them in your business tax preparation.
Do you have workers?
If you hire full-time or part-time workers, they should fill out the W-4 form to register as taxpayers. Usually, their tax ID for business is their Social Security Number. If you hire any independent contractors or freelancers, they need to fill out a W-9 form. Send them invoices and the 1099-Misc form before the end of the tax year.
Remember to deduct expenses
The IRS defines deductible expenses as the purchase of necessary and typical items. This means that you have ample opportunity to make deductions. Keep in mind, however, that if something doesn't seem reasonable, it will likely be discovered in the event of an audit. For example, most companies can write off the purchase of a new computer or phone, but even if you have a physical job, a gym pass can be disallowed.
Don't ignore your business taxes
Improper tax accounting can get your small business into big trouble. When starting a company, find out in advance about any taxes that apply to your business. By preparing and planning ahead, you will avoid potential pitfalls and be able to devote more time to the success of your business. You can learn more about running your first business from our guide.