A Guide to Small Business Taxes

A business tax is just what it sounds like: a tax on business income. Learn more. Sourced ramseysolutions.com

2/22/20233 min read

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A Guide to Small Business Taxes

Your business is killing it and your customers are being served. You just need to keep Uncle Sam and the IRS—off your back. And to do that, you need to know about taxes on small businesses.

Before we get started, let’s define the term business tax. A business tax is just what it sounds like: a tax on business income. Pretty straightforward so far, right? Now, let’s talk about the types of business taxes that apply to small-business owners.

Types of Small-Business Taxes

How you set up your business—as a C corporation, sole proprietorship, etc.—will determine which taxes you pay and how you pay them. 1 There are a bunch of small-business taxes to know about, and it can feel pretty complicated (especially with all the IRS lingo). So, to save you time and stress, let’s walk through it all together in plain English.

1. Income Taxes

All businesses must file an annual income tax return. C corporations pay income tax at the corporate rate, while all other businesses are considered pass-through entities and are taxed at the individual rate (we’ll dig in on these in a minute).

2. Estimated Taxes

Freelancers, independent contractors and small-business owners who expect to owe at least $1,000 in taxes need to estimate and pay quarterly taxes. If you don’t pay them, or don’t pay enough, you can be hit with penalties and interest and open yourself up to all kinds of unpleasantness. So, you need to be sure that you know the due dates and the payment period for the estimate.

When You Get Paid Tax Due Date
Jan. 1–March 31 April 15
April 1–May 31 June 15
June 1–Aug. 31 September 15
Sept. 1–Dec. 31 January 15 new year

3. Self-Employment Taxes

Working for yourself is all fun and games until Uncle Sam barges into your home office. That’s right, the IRS has created a tax just for you—aren’t you special? Luckily, if you plan for it, you’ll be okay.

People who are self-employed have to pay self-employment taxes, which cover Social Security and Medicare taxes.

You must pay self-employment taxes if:

Your net earnings are $400 or more
You work for a church or a qualified church-controlled organization that elected an exemption from Social Security and Medicare taxes, and you make $108.28 or more in wages.3

Setting aside 25–30% of your income to pay these taxes. This way, you’re not hit with a massive, unexpected, and let’s just say it, annoying, bill at the end of the tax year.

Don’t learn this lesson the hard way. Plan now!

4. Employment Taxes

If you have employees, you have to pay employment taxes, which include:

Social Security and Medicare taxes
Federal income tax withholdings (this is technically paid by your employee, but you’re responsible for making sure Uncle Sam gets it)
Federal unemployment (FUTA) tax5. State and Local Taxes

Depending on where you live, you may also have to pay state and local taxes. The types and amounts of taxes you’ll pay are different depending on your location.

6. Excise Taxes

Depending on your business type, you might have to plan for excise taxes. These are taxes imposed on the manufacturing or selling of specific goods. Excise taxes are often called sin taxes because the items on this list have a reputation for being potentially bad for people or society.

A few examples of these goods include:

Heavy-duty trucks and vehicles
Alcohol and tobacco
Candy and fast food

7. Property Taxes

If you own property as a small-business owner, you’ll have to pay property taxes. These taxes are typically assessed at a county or city level.

8. Sales and Use Taxes

If you sell things, you’ll be responsible for collecting sales taxes. If you sell things online, this can get complicated, because some states charge based on where the seller is located, while other states charge taxes based on where the buyer is located.