The recently enacted Tax Cuts and Jobs Act (TCJA) has made important changes to the federal tax code and just about every taxpayer is affected, including you and your business. This guide will help you a lot to simplify things to give you an overall perspective on the changes. learn more about how the small business tax rate is going to affect your business and how that will lead you to make some fruitful business strategies.

And while it will not eliminate your business taxes, it can help you prepare and unlock substantial 2019 tax deductions for your small business.

While understanding how small business taxes are calculated and applied may seem overwhelming to any or some business owners, however, understanding a few basics could of great help to you while making decisions and working with your tax professional.

This guide breaks down the various types of business taxes which your business or company may be subject to, along with the different tax rates that are applied to your business earnings and how the new tax law will affect your business as a whole.

Taxes and Rates

tax rates

On the plus side, the TCJA substantially reduces the income tax rate for corporations. And, if you have a pass-through entity, you can now expect a larger deduction. However, on the downside, a number of tax savings have been eliminated.

Where does that leave your business taxes? You will not quite know what kind of tax break you are going to get if any until you go through the process properly.

Taxes are complicated. A lot of small business owners struggle to understand how their tax liability is determined when carrying out their financial accounting tasks.

Also, many business owners don’t know the corporate income tax rate, what tax cuts they are eligible for, or what terms like pass-through income even mean.

In addition to income taxes, businesses also have to pay payroll taxes, unemployment taxes and other several types of taxes, which we shall look at in the following sections.

Starting this year, the small business tax rate for C-corporations is a flat 21 percent. That is down from a max of 35 percent. Different businesses pay different amounts depending on their type of entity.

So, if you have a pass-through entity, then your business taxes are based on your personal tax rate, which can range between 10 and 37 percent, respectively.

Something else new for 2019: entities can deduct up to 20 percent of their business income before calculating the tax rate. But before you start calculating, let us first consider the six different types of business taxes.

(i) Income Taxes

You are probably familiar with income taxes. If you are a traditional C-corporation type of business, you have to pay taxes on your business’ net income for the year. The net income is determined once all deductions have been taken into account.

However, if you do have a pass-through entity, such as an LLC, sole proprietorship, or an S-corporation, then your business does not require to pay any income tax. Instead, the taxes will be assessed at your personal income rate.

(ii) Employment/Payroll Taxes

This is simple. If you have employees, you are obliged to pay employment taxes, also known as payroll taxes. These are based on their wages and include Social Security and Medicare taxes, federal income tax withholding, as well as federal and state unemployment taxes.

This trips many businesses up, especially if you are doing your own bookkeeping. And, failing to make these tax payments in a timely manner can lead to heavier penalties.

(iii) Self-Employment Taxes

Now, what if you are self-employed? Yes, you have to pay self-employment taxes. Like payroll taxes, this includes Social Security and Medicare.

And while businesses typically cover a portion of this, a self-employed business person has to cover the entire amount. Thus, in other words, your independence comes with a price.

(iv) Excise Taxes

Excises taxes are duties taken on manufactured goods at the time they are created rather than when they are sold. Three main examples would be tobacco, alcohol, and petrol (gasoline). If your business deals in an industry or with products or services that are subject to excise taxes, then you are responsible for collecting and sending them to the Internal Revenue Service (IRS).

(v) Sales Taxes

This tax is common and we all know this one. The thing is, the sales tax rates are different, depending on your location.

So, you have to be well versed on the local and state sales taxes you are responsible for collecting and reporting. Even if you sell online, there may be some instances where you will need to collect sales tax from out-of-state customers.

(vi) Property Taxes

If you own commercial property, whether it is a brick-and-mortar location or just a plot of land, you have to pay property taxes to the city or county where it resides.

Timing is Everything – When Should You Pay Taxes?

In addition to knowing how much your business needs to pay in taxes, it is also essential to know when you are supposed to pay them. Most business owners are required to pay estimated income and self-employment taxes throughout the year, on a quarterly basis.

The amount is based on what you believe your taxable income will be at the end of the fiscal year. It is not always easy to predict, though.

However, if you estimate too low, you will be paying a lot at the end of the year. And, if you fail to pay quarterly, then you will be subject to higher penalties and interest.

Estimated taxes are ones which you pay throughout the year, based on what you think your taxable income at the end of the year is going to be. Any business owner who expects to owe more than $1,000 in taxes for the year must pay estimated taxes on a quarterly basis.

The estimated tax payments you make throughout the year are deducted from your total liability when you file your tax return. Federal tax is a pay-as-you-go tax and you can incur penalties and interest if you fail to make the required estimated tax payments when they are due.

Income Tax Rates for Pass-Through Entities and Sole Proprietorships

The tax rate for pass-through entities and sole proprietorships is equal to the owner’s personal income tax rate. For 2019, personal income tax rates range from 10 percent to 37 percent, depending on income level and filing status.

Thus, a single filer who reports $100,000 in net business income will pay a 24 percent tax rate. For the first time in 2019, sole proprietors and owners of pass-through entities can deduct up to 20 percent of their business income before their tax rate is calculated.

So, the tax filer may deduct up to $20,000 from the net business income and they would only have to report $80,000 in income, thus, reducing their tax rate to 22 percent from the income.

There are, however, limits on this deduction based on income and type of business. One must earn less than $157,500 (single filers) or $315,000 (joint filers) to qualify for the full deduction. Professional service businesses, such as law firms and doctor’s offices, typically cannot claim the full deduction either.

(a) Employment Tax Rates

Employment tax rates include all of the following:

  • Social Security Tax:4 percent on wages paid up to $128,400 for 2019. Employers pay half of this amount, while the other half is deducted from the employee’s wages. So if you are self-employed, then you pay the full amount as part of your self-employment taxes.

  • Medicare Tax:9 percent of all wages paid to an employee (no wage threshold), with the tax split between employer and employee. There are additional medicare withholding requirements for employees who are paid above $200,000 per year.

  • Federal Unemployment Tax:2 percent of the first $7,000 you pay to an employee. You can usually take a credit against this tax if you’ve paid state unemployment taxes. If you are entitled to the maximum 5.4% credit, then the federal unemployment tax rate is reduced to 0.6 percent.

  • State Unemployment Tax: Here, each state charges its own state unemployment taxes, where the rate typically depends on the size and age of your company, industry, historical rate of turnover at your company and how many of your former employees have applied for unemployment benefits.

(b) Excise Tax Rates

Excise tax rates vary greatly based on the specific type of product or service that you sell. More information about the different types of excise taxes and rates easily available in the Internal Revenue Service’s (IRS) Publication 510. Some states also charge excise taxes.

(c) Sales Tax Rates

Sales tax rates vary based on state and locality. The first thing you should do is determine if you are in an origin-based state or a destination-based state.

In The origin-based states, like Texas and Pennsylvania, sales tax rates are based on where the seller or business operates. In destination-based states, like Florida and New York, sales tax rates are based on the customer’s location. Within states, rates might also differ based on which locality you’re in and what types of products you are selling.

(d) Property Tax Rates

Like sales taxes, property taxes too, vary significantly based on your city and county. When you purchase a property, the property will be registered with the local tax authority. This agency will provide you information about property tax rates and deadlines.

Property taxes are levied on the property’s assessed value, and not on the purchase price or fair market value.

(e) State Small Business Tax Rates

In addition to federal taxes, businesses are responsible for complying with state and local tax obligations as well. With the exception of South Dakota and Wyoming, all states levy a tax or charge of some sort on business income. Here are three main models for state small business tax rates:

  • Corporate Income Tax: In most states, C-corporations must pay a corporate tax rate of 4-9 percent on net business income.

  • Gross Receipts Tax: A few states, including Texas and Washington, charge gross receipts tax instead of a corporate income tax. Gross receipts tax is levied on a business’ gross sales, instead of net income. A business usually cannot take deductions before this tax calculates.

  • Franchise Tax: Some states charge a franchise tax in addition to, or instead of a gross receipts tax or income tax. A franchise tax calculates on the value of a business’ stock or assets, which usually ranges from 0.1 percent to 0.9 percent.

However, even if a state does not charge individual income tax, businesses might still have tax obligations. For instance, New Hampshire does not levy an individual income tax but does have a corporate income tax and franchise tax. Also, some states might charge their own equivalent of payroll taxes and excise taxes. Sales taxes are at the state and local levels.

Tax Savings

One of the smartest moves you can make as a business owner is investigating and utilizing any and all legitimate 2019 tax deductions for business expenses. This can greatly reduce your tax bill. Deductions can include the costs of certain assets, net-operating losses, and even tax credits you may qualify for. Tax credits are particularly sweet given the value of their dollar-to-dollar saving.

Figuring It All Out

So, how do you determine exactly what you owe in taxes? Use the above guide to identify what you are responsible for first. Then, visit the IRS website to determine the tax rates that apply to your business. It also helps to review your bookkeeping and determine current withholdings to see what you have already paid for the year.

This way, you could be in better shape than you think. If you are having reservations about doing business taxes yourself, you should definitely reach out for expert advice.

Whether you are looking for someone to prepare and file your federal business tax return or to manage your bookkeeping throughout the year, get everything in proper order before the deadline. That way, you can stay focused on growing your business.

Their expertise can help you understand the types of taxes your business is responsible for and make sure that you are paying the correct small business tax rate.

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