All businesses are required to pay certain taxes to the IRS and state tax authorities. As a small business owner, it’s your responsibility to ensure that you meet your federal and state tax obligations. Whether you run a sole proprietorship, partnership, S corporation, or C corporation, these are the five main types of taxes your business may be responsible for.
Income taxes are based on income generated by a business and are paid on both a federal and state level. Depending on the type of entity your business is registered as—also known as your business structure—your small business tax obligations vary.
C corporations are subject to double taxation, once at the corporate level and once at the individual shareholder level. For C corporations, taxes are paid based on the net income of the business at the entity level. Additionally, if there are “dividends” paid out to the shareholders of the C Corporation, the dividends would be taxed on the individual’s personal income tax return.
The current federal income tax rate is 21% for C corporations.
On the other hand, all other types of business entities such as sole proprietorships, partnerships, and S corporations pay income taxes on an individual level. While sole proprietorships are reported straight on the individual’s 1040, Partnerships and S Corporations file a separate tax return to report the income/loss activity of the business.
These entities are known as “flow-through” entities because the income is first reported at the entity level and then “flows-through” to the individual’s tax return on Schedule K-1.
Unlike the C Corporation which pays taxes at the entity level, the Partnership and S Corporation pays no federal taxes. Business owners of these entities are responsible for reporting business income and expenses on their individual tax returns. Income taxes are then paid based on the tax bracket you fall into.
A business’ state income tax varies from state to state and potentially city to city. Depending on where your business operates and where you create economic nexus, you may have filing requirements in different state and local jurisdictions. The rules for economic nexus are complex, and it is best to consult with your tax adviser if those rules apply to you.
Estimated taxes are the payments businesses are required to make on a quarterly basis. For C corporations, estimated taxes must be paid if you expect to owe more than $500 in taxes. For all other business structures, you are required to pay taxes if it’s likely you’ll owe more than $500 on your individual tax return.
The estimated tax deadlines for 2023 are as follows:
- January 17, 2023: 2022 fourth quarter estimated taxes due
- April 18, 2023: 2023 first quarter estimated taxes due
- June 15, 2023: 2023 second quarter estimated taxes due
- September 15, 2023: 2023 third quarter estimated taxes due
- January 16, 2024: 2023 4th quarter estimated taxes due
If during any year the due date falls on a holiday or weekend, taxes will be due the following business day.
As a sole proprietor or partner who materially participates in your own business, you are subject to the employee and employer portion of Social Security taxes and Medicare Taxes. . If you personally earned more than $400 from business activities, it should be reported as self-employed income and paid at the self-employment tax rate.
The current self-employment tax rate in 2023 is 15.3% and is divided as follows:
- 12.4%: Social Security tax
- 2.9%: Medicare tax
If your small business has employees, you have certain employment tax responsibilities, also known as payroll taxes. Examples of employment taxes include:
- Social Security and Medicare tax: Employers are responsible for deducting Social Security and Medicare taxes from employee paychecks, as well as paying a portion of these taxes. The Social Security tax rate is 12.4%—6.2% is paid from the employee’s wages and 6.2% is paid by your business. The Medicare tax rate is currently 2.9%—1.45% is paid out of the employee’s wages and the employer pays the other half.
- Federal and state income tax withholding: As a business owner, you are responsible for withholding income taxes on behalf of your employees. The amount withheld will vary per employee, as it is based on the W-4 allowances they claimed.
- Federal unemployment tax: The current federal unemployment tax rate (FUTA) is 6% on the first $7,000 of income for each employee. You may also be responsible for paying state unemployment taxes, which may differ from the federal rate.
Excise taxes are additional taxes you may have to pay on specific goods or services. If your business performs any of the following, you may have to pay excise taxes:
- Environmental taxes
- Communication and air transportation taxes
- Fuel tax
- Retail tax (truck, trailer, semitrailer chassis and bodies, and tractor)
- Ship passenger tax (transportation by water)
- Manufacturers taxes (coal)
For a full list of which goods and services excise taxes may apply, refer to the excise tax overview page on the IRS website.