Understanding different types of Taxes. If you are planning to put up a business, you have to be aware of taxes involved in running it. Failure to do so may incur serious trouble not just for your business but also for you. So what are these taxes that you should be aware of? We are talking about city tax (also referred to as municipal tax), state tax, and federal tax. In this blog post, I’m happy to share with you everything I know about these taxes.
City Tax and State tax are local taxes. The local government collects these taxes to fund public services ranging from education to garbage collection and sewer maintenance. While Federal tax is the money that the government uses to pay for the country’s development and maintenance. To elaborate, the fund is used for the following:
- Infrastructure maintenance, building, and repair.
- Pension and benefits of workers under the government.
- Food and housing assistance for the poor.
- Sectors development such as education, health, defense, agriculture, utilities, and public transportation.
- Emergency disaster relief.
- Space exploration and other new feats undertaking.
Now that you know what the taxes are for, you must now be aware of the kind of taxes involved for your business.
On any income earned or received during the year– most businesses must file and pay federal taxes. Except for partnership, where each partner reports their share of profits or loss on their individual tax return. And what they file instead is an annual information return.
Each state and locality has its own tax law on income taxes for businesses or corporations. But almost all states impose it. You have to find out through the IRS website or your local state’s office if your business entity has to file income tax on both state and municipal levels.
As an employer, it is your responsibility to file and pay employment taxes if your business has employees. These taxes are:
- Social Security and Medicare taxes
- Federal income tax withholding
- Federal unemployment tax (FUTA)
Note: FUTA guarantees that people receive unemployment insurance after they lose a job.
Businesses in all states pay health benefits for State employees and taxes on unemployment insurance.
The federal government taxes businesses that manufacture or sell certain products. If your business uses various types of equipment, facilities, or other products, you may need to pay an excise tax
Excise tax is imposed by federal government taxes for businesses that manufacture or sell certain products or even uses various types of facilities, equipment, or other products. Learn more about the excise tax on the IRS website.
Each state and even some cities impose different definitions of property tax. It can be for commercial real estate locations, vehicles, computer equipment, and other business assets. Checking the IRS website would help you see if your state would tax your properties. The amount of tax for property tax is the percentage of the total value. But on some local taxes, it’s only a portion of a certain percentage of the value.
Sales and Use Tax
Some states and cities impose a tax on the sale of products and services. But with the exclusion of sales tax on food, clothing, medicine, newspaper, and utilities. Some states and cities may not require sales tax but some collect tax for the usage of goods and services. Usually, this is for products and services that are purchased outside the state.
For income that is not subject to withholding, businesses must pay federal taxes. But if the amount of federal income tax being withheld is not enough to cover owed taxes, an estimated tax must be paid.
Self-Employment Tax – Social Security and Medicare taxes are for people who have their own business (like someone who manages their own online store) or are self-employed.
As you see the number of taxes, you may be thinking twice about putting a business. Don’t be! Depending on your business entity and industry, you may not need to file for most of those taxes. Visit the IRS website for more details. Plan ahead, be well-informed and don’t miss on taxes. Before you become afraid of taxes, keep in mind that successful businesses do pay their share too. That means, no matter what taxes your business has to pay, with the right business planning, you can run your own too.