No one likes paying taxes but in this lesson, we are going to outline what, when, why and how much your business will be taxed. Pay attention because each one of these taxes might represent an audit in the future and once that happens anything you do could be too little too late.
THIS LESSON IS JUST AN OVERVIEW AND MEANT TO HELP YOU BE AN EDUCATED CUSTOMER, NOT A BECOME A TAX EXPERT, GETTING THIS STUFF WRONG CAN LEAD TO SERIOUS FINES AND POTENTIALLY JAIL TIME SO PLEASE CONSULT AN ACCOUNTANT!
But I do my own personal taxes? Taxation is different when you are the business owner. As an employee, a lot of stuff was done for you. But now that you are the owner, you are responsible for taking care of the taxes for your employees.
When do you pay taxes: As a business, you generally have to pay taxes each quarter, not just once a year.
Taxes to keep in mind as an owner-
If you are an LLC (or Sub chapter S) most of the taxes relating to income will pass from your company to you personally (through a K1) but this is not always the case so having a bookkeeper and organized finances will help you to determine if you may be subject to double taxation
If you run a corporation, the corporation (c corp) will pay taxes (the salary paid to employees is a cost so is not taxed at the corporate level) and issue a 1099 dividend for taxation purposes
Similar to federal taxation however each state varies, and we don’t have the space to talk about all 50 variations but it is CRITICAL that you understand what happens if you are generating revenue (e.g. serving contracts) in different states. and the key question here is “where you are legally operating. So, for example, You may live in Virginia but your company is incorporated in Maryland and your contract is with a federal agency located in DC. So how much of your revenue gets to be taxed by each state?
Where is the revenue being earned? The key question is where the revenue is being earned (where the work is being done).
Case 1: So let’s say you that you work 5 days a week in DC, well then you need to report 100% of the revenue in DC
Case 2: Let’s say you work 4 days a week in DC, and 1 day a week from home (VA), well then 80% of the revenue gets reported to, and taxed in, DC and 20% gets reported to, and taxed in, VA
What to do: If you are working and living in one state only then you can probably do this yourself, but as soon as you have multi-state issues we really recommend that you work with a certified accountant that can help you navigate through the different regulations and ensure you are following the rules–not doing so can cost you a lot of time, tax penalties, and/or legal fees.
Regional: Like local taxes these vary widely. While not always present, when they are, they must be paid, so ask people at the chamber of commerce or local SBA business support services.
Local: Local taxes vary widely as your locale changes and you will need to allocate revenue between counties like you do for states and unfortunately the “burden of proof” falls on you as the business. While we can’t tell you all the taxes a local government might have here are some of the more common ones:
- Bpol (license tax): Normally a % of your revenue
- Tangible property tax: Based on the value of the assets in the county or city (e.g. Furniture, computers, servers)
- Vehicle tax: Different from the tangible tax but based off of company owned vehicles
- Sales tax: Based on the price of the taxable goods sold at each location
- This is generally on goods but some places (such as Connecticut) have started taxing services as well
- If you are selling to the government, you might be able to obtain a waiver if you are working through a prime (i.e. you are the sub).
- Franchise tax: Based on the derived value from a franchisor
- Federal: Pub15(b)–details the taxation and benefits exemption based on benefits offered to employees and circular(e)–details the taxation for payroll employees from IRS for withheld, social security and medicare, and FUTA (Federal Unemployment Tax Agreement)
- State: See each state regulation and make sure to know if there are interstate agreements as this might impact SUTA (State Unemployment Tax Agreement), SUI, and workers’ comp
- Telecommuting: This gets especially confusing if you have employees that are telecommuting so we recommend talking to an accountant
- County and local: Varies and generally effects employees but your company may also be required to withhold earnings
Other taxes: Vary based on the nature of your operations
Overseas: If your company is operating overseas, there may be additional taxes