What are the taxes small business owners need to know about? The first one that comes to mind is income tax. Everyone’s familiar with this. Once a year, you file a tax return—either for your business and/or your personal return. You have entities like LLCs, partnerships, S corps, and C corps. Those all have separate tax filings. If you're a sole proprietor, your business activity goes on your personal return. These income tax returns will cover your federal income tax, and there’s usually a state income tax that comes along with it.
You may also get a request from your accountant to make quarterly estimated income tax payments as a prepayment for your income tax for the upcoming year. We have some articles and blog posts if you're looking to do that yourself, but most people will hire an accountant. A good accountant can handle the income tax filing for you.
Another important tax is property tax. We’re familiar with property tax if we own a house and have a mortgage. The same applies if you own a commercial building. But something that’s often overlooked is what they call personal property tax, which relates to assets you use in your business. Your county may charge a tax just because you’re using items like desks, chairs, or computer equipment in your business.
Isn’t that great? You buy it, you pay sales tax on it, and then—just because you’re using it in your business—your county or city makes you pay an additional tax. I can’t even tell you what services you actually get from your local government for this. But it’s something that has to be done, and you can get penalized if you don’t file it.
Many states have an exemption limit. For example, if you have under $10,000 of assets in your business, you may only need to file an exempt return each year rather than listing your assets. But you’ll have to check your local rules to see what’s exempt and how to file.
Sales tax is another one to understand. The interesting thing about sales tax is that it’s not actually your tax—it’s your customer’s tax. The government obligates you to collect it on their behalf, and if you fail to collect or remit it, you’re the one penalized, not them. The government even views mishandled sales tax as theft because it’s money you collected from a customer but didn’t send to the state.
Every state has different rules. Sales tax rates vary from county to county and city to city. Sometimes you’ll have a county tax, sometimes a city tax, and sometimes additional local taxes on top of that. If you sell products or services, some may be subject to sales tax and some may not. Make sure you understand the rules where you operate and sell so you don’t get in trouble. While this isn’t technically your tax, it’s still your responsibility to handle correctly.
Finally, let’s talk about employment tax. If you have W-2 employees, I strongly recommend using a payroll company. We don’t handle live payroll for clients, though we do simple payroll when the owner is the only employee. However, we work closely with ADP and can help clients interface with them if they have questions or issues.
Do not try to do payroll yourself. Every client I’ve ever had who handled their own payroll made mistakes. I had one client who manufactured their own products and refused to hire a payroll company year after year—even after I showed them they were paying more in penalties than it would have cost to have someone else do it correctly.
So don’t mess around with this. Get a good payroll service. If you want a resource, let us know.
These are the most common and important taxes that affect small business owners: income tax, property tax (including personal property tax), sales tax, and employment tax. Remember, the government doesn’t care if you understand these taxes or not. They hold you legally responsible as if you do understand. So do it the right way.
