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Understanding Taxes as a Small Business Owner

Navigating taxation as a small business owner can be a tricky task. Knowing when, where and how much to pay in taxes is both necessary and important. It’s important to familiarize oneself with the taxation process to ensure a smooth tax filing experience and to avoid penalties.

Table of Contents:

Understanding Taxes as a Small Business Owner

Local, State and Federal Taxation

Understanding taxes as a small business owner can be complicated, but learning about the different types of taxes is essential. Local, state, and federal taxation all contribute to the total amount of taxes a small business must pay.

Local taxes are usually a combination of city or county taxes, such as property or sales taxes, that must be paid to your local government. Depending on where your business is located, you may be subject to additional local taxes or fees.

State taxes typically include income taxes, unemployment taxes, and other taxes that must be paid to state governments. Depending on where you live, you may also be subject to state taxes such as sales or property taxes.

Finally, federal taxes refer to the taxes that are collected at the federal level, including Social Security taxes, Medicare taxes, and income taxes. All businesses must pay federal taxes, regardless of whether they are located in the United States or elsewhere.

By understanding the different types of local, state, and federal taxes that apply to your business, you can make sure you are in compliance with all applicable tax laws.
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The Types of Taxes to Be Aware Of

As a Small Business Owner, it is important to be aware of all the types of taxes you are responsible for understanding and filing for your business. The most common taxes for a small business include income taxes, payroll taxes, sales taxes, and property taxes.

Income taxes are based on the profits a business earns and need to be paid to both the federal and state governments. Payroll taxes, such as Social Security and Medicare, are deducted from employee wages and must be paid to the IRS. Sales taxes are additional taxes paid on the sale of certain goods and services and may vary by state or locality. Property taxes are based on the value of the real estate owned by the business and must be paid to local governments.

In addition to these taxes, small business owners may also be responsible for filing other types of taxes, such as unemployment taxes, worker's compensation taxes, and franchise taxes. It is important to understand all of the types of taxes applicable to your business and ensure that you stay compliant with all your filing requirements.

Unsure of What You Owe?

For small business owners understanding taxes can be a daunting task, and not understanding what you owe in taxes can be downright nerve-wracking. Knowing what you owe in taxes can help you ensure that you are on the up and up with filing your taxes and increase accuracy. If you are unsure of what you owe, it's important to seek out accurate resources to get the correct information.

It's important to look into government and state resources to learn about local taxes that may apply, such as sales tax and property tax. Speak to a certified accountant or other tax professionals who can help you understand your obligations and determine what you owe. They can help you connect with tax credit information, filing and payment deadlines, and other helpful resources. Utilizing these resources can help provide clarity and alleviate any confusion concerning what you owe in taxes.

How to File Tax Returns

For small business owners, understanding taxes and filing returns is essential for their success. It is important to be aware of the various forms and deadlines for filing taxes as it is essential to stay compliant with the law and to avoid hefty financial penalties.

One of the primary steps for filing taxes is to determine your filing status. On your federal taxes, common statuses include single, married filing separately, married filing jointly, and head of household. Your filing status will be used to determine rate brackets, deductions, and credits that you qualify for.

You will also need to determine which forms you will need to file and gather the applicable financial information and documentation. Depending on the type of business you own, you may need to fill out required forms and provide supporting documentation, such as receipts and invoices. Once all the forms are completed, you can use an online software platform or an accountant to file your taxes.

Finally, if you owe taxes, you will need to pay them on or before the specified date. Failure to do so can result in penalties, interest, and other financial implications. It is important to budget accordingly and make your payments on time to avoid costly mistakes.

What Is a Self-Employment Tax?

Self-employment tax is a type of tax levied on income earned through self-employment. It is calculated by taking a percentage of a person's eligible net earnings. This tax is used to help fund Social Security and Medicare benefits. It is typically deducted from an individual’s quarterly or annual income tax return, however, some states may require that it would be paid directly. As a small business owner, it is important to understand the specifics of self-employment tax, including who must pay it and how it is calculated. In addition, it is important to understand the filing process, any deductions available, and the potential penalties associated with non-payment. Knowing these details can help small business owners make informed decisions in planning and managing their taxes.

Estimated Tax Payments

Estimated tax payments are one of the most important taxes to consider as a small business owner. Estimated tax payments are payments made four times a year, based on the estimated amount of taxes you owe for the full year. They are paid quarterly and due on the 15th of the 4th, 6th, 9th, and 12th months of the year.

It’s important to make estimated tax payments in order to avoid a penalty from the IRS for not paying enough throughout the year. Depending on the amount of money you make, estimated tax payments may range from several hundred dollars to several thousand dollars. If your estimated payment is more than $1,000, you may benefit from getting a payment plan set up until you’re able to pay it off in full.

Understanding when to make estimated payments and how much they should be is key to managing your taxes and ensuring that you’re in compliance with IRS requirements. Knowing exactly how much to pay each quarter and which forms need to be completed, can provide you with peace of mind that you’re on track with your taxes.

Keep Accurate Records

As a small business owner, it is essential to understand the importance of keeping accurate records. Maintaining a detailed accounting of all financial transactions will help ensure accuracy when it comes to preparing taxes and filing returns. Proper record keeping includes invoices, receipts, and all other documents relating to transactions your business makes.

These records, along with your tax returns, should be kept for a minimum of three years due to IRS audit requirements. Track all income and expenses throughout the year, and be sure to keep separate accounts for personal and business expenses. This will make it much simpler to make deductions and file returns accurately come tax time.

By keeping accurate records, small business owners can remain organized while staying compliant with federal tax regulations.

Navigating Tax Deductions

As a small business owner, understanding available tax deductions is essential for the long-term success of your business and its bottom line. Careful tax planning can potentially save your business thousands of dollars, but navigating the deductions process can be daunting.

The IRS provides a list of basic business expenses that are generally accepted, but it is ultimately up to the taxpayer to decide which deductions they can significantly benefit from. Common deductions include supplies, equipment and other asset purchases, employee wages, business travel, home office expenses, health insurance, and more. Consider consulting with a tax advisor to review your specific business’s tax situation and determine which deductions you should focus on for the best savings possible.

Keep in mind that standard IRS rules apply to all deductions. What constitutes an acceptable expense is up to the individual’s discretion, but the IRS has set guidelines that cannot be ignored. Therefore, make sure to keep detailed records of all expenses to have proof of deduction eligibility when necessary. Additionally, it may be helpful to track your receipts electronically to make the deduction process quicker and easier.

Navigating the tax deductions process can be a challenging and time-consuming process, but with some upfront research and planning you can ensure your business gets the most benefit from every deduction available to it.


Navigating taxation as a small business owner can be difficult to understand but with the right knowledge it doesn’t need to be. Understanding local, state and federal taxation, the different types of taxes, how to file returns and deductions, can provide piece of mind and protect against hefty penalties.
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