Opening a business is a major undertaking because there are so many things to consider. One of these is what types of taxes have to be paid. The specific taxes that a business will have to pay depends on the business structure, the type of goods or services they handle and their location.
Some business taxes are universal, so nearly every business can expect to pay these. Knowing what to expect can make it easier for entrepreneurs to plan for the financial impact.
1. Federal income taxes
Almost every business has to pay federal income taxes. The way this is done depends on the type of business structure used. Sole proprietorships and limited liability companies are typically taxed through pass-through taxation. Others have direct taxation through the business.
2. Employment or self-employment taxes
A business that has employees has to pay employment taxes, Social Security, Medicare and unemployment taxes. Those taxes, except for the unemployment taxes, are paid through payroll deductions. Unemployment taxes are paid by the employer. Even without employees, the owner may have to pay self-employment taxes.
3. State and local taxes
State and local taxes might also have to be paid. The types and rates of these depend on the jurisdiction, so it’s critical to find out what these include.
Since the taxes that have to be paid depend partially on the business structure, it’s critical to ensure that the proper structure is chosen. New entrepreneurs should ensure they have someone on their side who can help them through this process.