Taxes can be very complex, and small businesses often run into difficulties when it comes to knowing all that they need to know about the obligations and benefits. With the range of tax requirements that are required by SMEs, it’s no wonder that confusion is rife. 2019 is only adding to the confusion, with the Tax Cuts and Jobs Act going into effect. The impending changes can make knowing what you have to pay and how much even more complicated. The best way to get more from your tax payments is to understand the key areas that you need to be aware of. SMEs that more fully understand their tax obligations will be the ones that can benefit the most.
Six Tax Types
SMEs will have to be aware of which tax types are relevant to them. There are several forms of Federal Income Tax alone, and you will be eligible to pay these depending on the type of business that you run, how your business is structured, your company acquisitions, and how many people you employ. The average SME will usually be looking at one of these six variations.
1: Income Tax – This is by far the most widely understood type of tax. Income tax is paid by individuals and by corporations, and the amount that you pay will depend on how much money you earn in a year. Some SMEs, such as those that have chosen to become an LLC or business with Sole Proprietorship, do not have to pay income tax. This is because they are referred to as pass-through entities, and the end result is that the owner of the business includes their business income when they make their private income tax return.
2: Payroll Tax – As the owner of an SME, you are legally required to pay the employment taxes of your workforce. Employment taxes (often known as payroll taxes) are renowned for being one of the more complicated types of tax that you need to pay. Many SMEs make use of an outsourced payroll company to make sure that they are paid correctly. The complexity is primarily caused by the fact that payroll taxes need to take several factors into account, including:
- Income Tax Withholding
- Medicare payments
- Social Security payments
- Federal unemployment taxes
- State differentiators
The reason that businesses outsource this area is that getting payroll taxes wrong can result in severe penalties. In extreme cases, there can even be criminal prosecution, so it’s vital that you understand the obligations of payroll tax and minimize errors.
3: Self Employment Tax – If you’re registered as self-employed then you will be responsible for paying this tax type. If you have earned more than $400 in a fiscal year through running your business, you are liable for this. There are exemptions, but these are primarily limited to churches and other religious organizations. Veterans with a disability may also be exempt from paying Self Employment Tax.
4: Excise Tax – Some industries are required to pay an excise tax on every sale of certain products. Usually, these taxes are included in the prices of that product, such as alcohol or cigarettes. It is then the responsibility of the SME business owner to gather that money together and send it to the IRS. There are exemptions to this type of tax as well, and these will vary from state to state. Sports wagering, for example, has been recently changed by the Supreme Court in regards to excise tax, meaning that you will need to check with your state about your obligations.
5: Sales Tax – This is not a federal tax, but rather one that is dictated by the state or locality in which your SME trades. As a result, as the owner of an SME, you will be responsible for paying the right amount of sales tax directly to the local and/or state governments. Some e-commerce SMEs believe that they do not have to pay sales tax because they only sell outside of their state, but recent clarification of this loophole has changed that. Sales tax is why you need to pay attention not just to federal tax requirements but state and locality ones as well.
6: Property Tax – If you own any form of property or land as part of your SME, you will need to pay tax on that. Even if you have only recently made this company acquisition, you will still have to pay property taxes. The amount that you pay will depend on the assessed value of your property. If you have recently taken out a commercial loan in order to pay for a property, then you will have usually been advised to factor property tax into your borrowing amount. You will receive your bill once a year, with the amount that you pay decided by your local area, but it is possible to contest your payments.
Reducing Tax Bills
Even two SMEs of the same size and sector can end up paying entirely different amounts of tax. Your final tax bill can be drastically affected by certain exemptions, and it should be a priority for your SME to evaluate your likelihood of being granted these. They include:
- Deductions – There are many parts of your business costs that can allow you to lower the amount of tax you pay. Compile a complete and thorough list of your business expenses, especially if you have recently made any company acquisitions. If you have paid for industrial machinery or vehicles (even if you have taken out industrial equipment financing), then you may not have to pay tax on that for an entire fiscal year.
- Net Operating Loss – If your business fluctuates in terms of profitability, you may be able to pay a reduced tax rate that optimizes your chances of future growth.
- Tax Credits – Tax credits are widely considered as more beneficial than deductions because they can be more reflective of a dollar-by-dollar tax rate. Some business types and sectors will have stronger opportunities for tax credits, with those using alternative fuels and energies being one of the SME options that are growing in popularity.
While taxes can be confusing and stressful, the more that you understand them, the more that you will be able to benefit. Make sure that you know all that you can about the taxes that you pay and the best ways to reduce them, and your SME will be more secure.