Today, I spoke with my absolute favorite kind of new client – a new business owner who wants to make sure she is covering all her bases when it comes to business taxes. Entrepreneurs who plan and ask for qualified professional advice have a better-than-average chance of meeting their goals.
All business owners need to know about taxes. All kinds of taxes: income, employment, sales and use, and property. Plus, if the business has sales or other business activities in more than one state, it has to follow the tax rules for each state. Needless to say, that involves more details than I can fit into this blog.
Here are the four basic tax areas that small businesses need to know:
- Income Tax
Net business income is subject to federal and state income taxes. For sole proprietors, net income is figured on Schedule C, which is part of the IRS Form 1040 for individual tax return. Net income is total business income minus the “reasonable and customary” expenses necessary to operate and sustain the business.
- Employment Tax
Payroll taxes of 15.3% must be paid on business wages or on net business income from self-employment using Schedule SE on the owner’s return. Non-owner employees must have taxes withheld and remitted to the IRS, state and Social Security Administration. Contractors to whom $600 or more is paid during the year are required to receive IRS Form 1099 to report their earnings.
- Sales Tax
State taxes are assessed on sales of products and some services, depending on the jurisdiction. Internet and mail order sales are subject to tax depending on the location of the seller and purchaser, and applicable laws. Businesses that operate in more than one jurisdiction, like my new client, must collect, report, and remit taxes in all applicable states.
- Business Property Tax
Tangible personal property used in a business is subject to property tax, usually collected at the local, or county, level. Taxed property includes furniture, machinery, tools, and all computer and peripheral equipment hardware and all operational software.
One business “tax” often overlooked by new businesses is a getting the appropriate business license for each jurisdiction in which it operates. Every business needs to be registered and licensed at the state and local level.
I am looking forward to meeting again with my new client next week. Entrepreneurs who plan and get professional advice not only meet their goals – they are fun to help.