Small business owners often make the mistake of diving in headfirst without considering the myriad of details associated with owning a business. One major part of owning business is taxes – something all businesses must pay. Knowing what to expect with your small business, can better help you plan ahead.
Your Legal Structure Says It All
One of the first things to consider before starting your business is determining its legal structure. The IRS will consider this structure when choosing how you pay taxes. As far as small businesses go, there are two common structures: sole proprietorship and LLC.
- Sole Proprietorship
If you work alone, this is likely the structure you need. A sole proprietorship is simple to set up and pretty simple when it comes to tax structures. You can still get the benefits of deductions and even reduce your tax liability if you file your paperwork correctly.
- Limited Liability Company (LLC)
LLCs are a great way to incorporate more members. Plus, they come with a lot of benefits when it comes to taxation. Enjoy more deductibles and avoid double taxation with an LLC.
Common Small Business Taxes
Small businesses cannot avoid taxes and will commonly see four types of taxes, all of which are important to maintaining and keeping your business afloat.
- Self-Employment Tax
Self-employment tax is a tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners.
- Payroll Tax
If you have an LLC or other legal structure which allows for multiple employees, you’ll have to pay a payroll tax. This means you account for Social Security and Medicare along the way.
- Sales Tax
In some cases, you may have to pay a sales tax. This is not on the federal level like some countries but could be part of the state level depending on where you live.
- Property Tax
If you have a location outside of the home for your headquarters, you’ll likely have to pay a property tax. The rates will depend on the state and county you live in and could be higher or lower depending on the location.
A Few Deductions Go a Long Way
Deductions can be your best friend no matter the size of your business. A few things which can be deducted as a small business owner include:
- Startup Costs
Of course, this is only within your first year. Make sure to add up everything you can think of to help avoid paying high taxes your first year in business.
- Operational Costs
Whatever you need to operate, use that to get a bit of a tax break on your small business.
- Donations and Gifts
Do something good for your community and save on taxes while giving back to the local people who trust your services or products.
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