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Knowing about and understanding the different types of business taxes can help you manage your business’s financial health.
When it comes to running a business, managing your financial obligations is just as crucial as growing your customer base. One of the most important areas to understand is taxation. Navigating the different types of business taxes can help you avoid costly mistakes, remain compliant with the IRS and state authorities, and strategically plan for your company’s financial future. In this blog post, we’ll break down the most common types of business taxes, who pays them, and how they affect your bottom line.
Income Tax
Income tax is the most familiar and widespread type of tax businesses must pay. This tax is levied on a business’s net income—essentially, its profits. How your business pays income tax depends on its legal structure:
- Sole proprietorships and partnerships pass income through to the owners, who report it on their personal tax returns.
- Corporations, such as C-corporations, pay income tax at the corporate level.
- S-corporations also pass income through to shareholders, who report it personally.
Proper bookkeeping and quarterly estimated payments are crucial to staying compliant with income tax obligations.
Self-Employment Tax
Self-employment tax applies primarily to sole proprietors, freelancers, and partners in a business. It covers Social Security and Medicare taxes, which are typically split between employees and employers in a traditional work setting.
If you’re self-employed, you’re responsible for the full 15.3% tax yourself. However, you can deduct the employer-equivalent portion when calculating your adjusted gross income. Understanding this component is essential among the types of business taxes if you’re running a solo operation.
Employment (Payroll) Taxes
If your business has employees, you’re responsible for payroll taxes, which include:
- Social Security and Medicare taxes (FICA)
- Federal income tax withholding
- Federal unemployment tax (FUTA)
- State unemployment tax (SUTA), depending on your state
It’s your job to withhold and remit these taxes correctly and on time. Payroll tax errors can result in heavy penalties, so it’s important to stay on top of deadlines and reporting requirements.
Sales Tax
Sales tax is a state-level tax that applies to the sale of goods and certain services. If your business sells physical products or taxable services, you’re likely required to collect and remit sales tax to your state’s Department of Revenue.
Sales tax rates and rules vary from state to state, and some localities have their own rates. Online sellers also need to be aware of economic nexus laws, which may require them to collect sales tax in states where they don’t have a physical presence.
Excise Tax
Excise taxes apply to specific types of goods or activities, such as:
- Fuel
- Alcohol
- Tobacco
- Heavy highway vehicle use
- Indoor tanning services
These taxes are often included in the price of the product and are usually paid by the manufacturer or producer, though the cost is passed on to the consumer. If your business deals in these types of goods, you must be aware of your excise tax responsibilities.
Property Tax
If your business owns real estate or other taxable property (such as machinery or equipment), you may be subject to property taxes levied by local governments. These taxes vary by locality and are based on the assessed value of the property.
Keeping accurate records of assets and understanding your local tax rules can prevent surprises at tax time.
Franchise Tax
Contrary to what the name suggests, franchise taxes are not just for franchise businesses. They are state-level taxes imposed for the privilege of doing business in that state. Some states require corporations and LLCs to pay this tax regardless of income level.
Franchise taxes can be based on income, assets, or a flat fee, and rules vary by state. Even if your business isn’t profitable, you may still owe this tax.
Why Understanding the Types of Business Taxes Matters
Grasping the different types of business taxes your company may face helps you:
- Avoid penalties and interest due to non-compliance
- Budget more effectively for tax season
- Take advantage of deductions and credits that lower your liability
- Make informed decisions when choosing your business structure
Many businesses find it helpful to work with a tax professional to navigate these complex obligations.
Get Help if Needed
Taxes are a critical part of doing business, and understanding the various types of business taxes is key to long-term success. Whether you’re just starting or scaling up, being proactive about tax planning and compliance helps you maintain financial stability and focus on growth.
If you’re unsure about which taxes apply to your business, consider speaking with a CPA or tax advisor who can provide guidance tailored to your industry and location. Staying informed today can save you thousands tomorrow.
Trust the Professionals at the Harding Group
Unlike other accounting firms, The Harding Group, located in Annapolis, MD, will never charge you for consultations and strive for open communication with our clients.
Are you interested in business advising, tax preparation, bookkeeping and accounting, payroll services, training + support for QuickBooks, or retirement planning? We have the necessary expertise and years of proven results to help.
We gladly serve clients in Annapolis, Anne Arundel County, Baltimore, Severna Park, and Columbia. If you are ready to take the stress out of tax time, contact us online or give us a call at (410) 573-9991 for a free consultation. Follow us on Facebook, Twitter, YouTube, and LinkedIn for more tax tips.