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Few things can kill a startup’s momentum as easily as getting on the wrong side of the IRS. The Internal Revenue Service is a hardened branch of the government — they want their money and they’re going to make sure that they get every penny from you that you legally owe.
Taxes aren’t always the easiest thing in the world to understand, however. If you’re a budding entrepreneur, you’re probably looking for the answer to the question, “how much tax does a business pay?” If so, you’re in the right place.
In this article, we’ll take a look at everything that you need to know regarding how much tax your small business pays.
Legal Structure Determines Tax Rate
The first thing to remember is that your taxation will be completely different depending on what kind of legal structure your business has. Whenever you started your company, you had to register it legally.
When you did so, you probably chose between three options: a sole proprietorship (you are the sole owner), some kind of partnership (limited and general), or some kind of corporation (limited liability, C Corp, or S Corp).
How Much Tax Does a Business Pay?
If you chose the right legal structure at the time, then chances are that your business is taxed in a pass-through manner. That means that your company itself does not pay taxes on its income. Instead, you as the owner pay personal income taxes whenever you take money out of the business.
The government has this setup in this way because it wants to incentivize small businesses to continue to grow and add jobs to the market. If you’re not taking the money out of the business, then you’re not usually taxed on it. But if you are taking it out of the economy and putting it for personal use, then you are taxed on it.
Remember that this is the only the case with certain legal structures. Most partnerships, a sole proprietorship, and a limited liability corporation are pass-through legal structures.
If you’re registered as a corporation, however, then you’ll be subject to a flat tax rate of 21%.
Remember that you are taxed only on your non-deductible income. You’ll be able to deduct many expenses, charitable contributions (if you have any) and such in order to reduce your corporation’s tax liability.
In addition, consider what tax credits you are eligible for. Tax credits don’t just reduce your non-deductible income, but they are directly applied to reduce the tax you owe.
When you’re using a fillable 1099 to submit your tax returns, be sure to use every loophole available to you to reduce your tax liability.
Taxes Made Simple
There you have it — taxes don’t have to be hard! With this quick overview, you’re well on your way towards how much tax does a business pay and how to calculate your business’s tax liability when April rolls around this year.
For more business advice, be sure to take some time to take a peek at and browse through the rest of the articles on the website!
