Taxes for Small Businesses (Overview)

Your business will need to meet its federal, state, and local tax obligations to stay in good legal standing. Your business structure and location will influence which taxes your business has to pay. Your business is legally required to pay taxes and keep accounting records on a consistent yearly schedule called a tax year.

Most businesses choose their tax year to be the same as the calendar year. You select your tax year the first time you file for taxes but can change it later with permission from the IRS.

  • Calendar tax year if you don’t have special accounting needs for your business.
  • Fiscal tax year if you want your 12-month accounting cycle to end in a month that isn’t December.
  • Short tax year if your business wasn’t in existence for an entire tax year, or you changed your accounting period.

If your business doesn’t have much reporting or bookkeeping, you might be required to use a calendar tax year. Check with the IRS for detailed rules about tax years.

ESTIMATED TAXES

Taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments. If you are in business for yourself, you generally need to make estimated tax payments. Estimated tax is used to pay not only income tax but other taxes such as self-employment tax and alternative minimum tax.

If you don’t pay enough tax through withholding and estimated tax payments, you may be charged a penalty. You also may be charged a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return.

You are also expected to make quarterly estimated tax payments for the current tax year. Some exceptions do apply. Estimated tax due dates.

ANNUAL BUSINESS TAX RETURN FILINGS

Every business owner is responsible for paying business taxes. All businesses except partnerships must file an annual income tax return. Partnerships file an information return. The form you use depends on how your business is organized.

Federal Business Taxes

Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. Your payments of SE tax contribute to your coverage under the social security system. Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.

Generally, you must pay SE tax and file Schedule SE (Form 1040 or 1040-SR) if either of the following applies.

  • If your net earnings from self-employment were $400 or more.
  • If you work for a church or a qualified church-controlled organization (other than as a minister or member of a religious order) that elected an exemption from social security and Medicare taxes, you are subject to SE tax if you receive $108.28 or more in wages from the church or organization.

You also pay tax self-employment tax on net earnings. If you are self-employed as a sole proprietor or independent contractor, you generally use Schedule C to figure net earnings from self-employment.

State Business Taxes

You are also required to file annual state tax returns for your business with the State Revenue Office.

Your state income tax obligations are determined by your business structure. For example, corporations are taxed separately from the owners, while sole proprietors report their personal and business income taxes using the same form.

If your business has employees, you’ll be responsible for paying state employment taxes. These vary by state but often include workers’ compensation insurance, unemployment insurance taxes, and temporary disability insurance. You might also be responsible for withholding employee income tax. Check with your state tax authority to find out how much you need to withhold and when you need to send it to the state.

Local Business Taxes

Depending on your business location and local city requirements, a local city tax return and a business privilege tax may apply. Check with your local city clerk’s office for full details on their tax requirements for small businesses doing business in the city where your business resides.