Sooner or later, every small business owner faces the tax dilemma. On the one hand, you already have enough expenses in your business. The last thing you need is a high-priced tax bill to drive up your blood pressure and push your budget over the edge. But on the other hand, you want to avoid an audit, and jail is definitely not an appealing option. What's a business owner to do?
You could start by looking on the bright side — the reason you have to pay taxes is because your business is making money. The trick is to pay exactly the amount of taxes you owe for the amount of money you have earned. Not a dollar less. Not a dollar more.
Although there are a number of ways to minimize your federal and state tax burden, there are certain taxes that you simply cannot avoid paying. Here's an overview: Business Income Tax
In the same way individuals are responsible for paying tax on their annual income, you must also pay tax on the income that is earned by your business. How this is accomplished is largely a factor of how your business is organized. Sole proprietors usually report business income on their personal returns. Businesses organized under an S corporation structure also allow for certain income to be reported on the owner's personal income tax return. Fully incorporated businesses, however, will need to file and pay income tax as a corporate entity.
Regardless of how your business is organized, business-related deductions will reduce your tax liability. Tracking your deductions will require the creation of an organized and efficient recordkeeping system. (Hint: A shoebox full of receipts is neither organized nor efficient!) Whatever system you use must take into account the need to tally and document your qualified business deductions. Many small businesses turn to technology to help them with this task. There are many affordable small business software programs that will do the job for you.
You should also be aware that you may be required to make estimated tax payments on a quarterly basis throughout the year. Failure to do so can result in penalties — an expense that can easily be avoided with a little planning and foresight. Payroll Taxes
The other large category of taxes you need to pay are payroll taxes such as FICA (social security), Medicare and unemployment.
A portion of payroll taxes are withheld from the employee's paycheck and a portion are paid by the employer. You will not only be responsible for paying the portion of payroll taxes you owe, but also for withholding the proper amount from your employee's pay and submitting those payments to the IRS in a timely fashion. Failure to submit payment for payroll taxes on time will result in penalties. Gross negligence can even result in criminal penalties.
Payroll services take the worry out of payroll taxes by helping you track withholdings and meet filing requirements in a timely manner. Most business owners find the fee charged by the payroll service is a small price to pay for the peace of mind they get in return.
Depending on the type of business you own, you may be subject to other taxes, e.g. sales tax. Consult your tax advisor
to determine the specific tax requirements for your business.