US Tax Compliance: What are the Types of Business Taxes?

Tax compliance is an important part of the global business puzzle, and this piece is a crucial fit because without it, firms can be in a lot of trouble. As a small business owner, settling tax obligations can spare you from tax penalties that can ruin your public image and credibility, among others.

As a small business owner, you are obliged to know the kinds of small business taxes that come with the services you provide and settle them in compliance with the law. In the US, there are five types of business taxes. 

Income Tax

Income tax is collected from your small business’ net earnings for operating in one business year. The US government levies collecting 21% income tax on corporations, which was reduced from 35% as the Tax Cuts and Jobs Act went into effect this 2018.  

Tax implications for businesses vary from state to state. Aside from your 21% federal income tax rate, 44 out of 50 US states also impose corporate income taxes, thus making your statutory income tax escalate to 25.7%. 

Businesses must file their income tax returns (ITR) annually. You can file your ITR from January until 15th of March (if you’re under S Corporation) or 15th of April (if you’re under C Corporation). 

Estimated tax

Estimated tax is the advance payment of tax based on an individual’s income, which is not subject to withholding tax, such as self employment, rental income and capital gains. 

Self-earning individuals mostly settle their estimated tax quarterly to the Internal Revenue Service (IRS) to avoid incurring penalties. They figure out their estimated tax through assessment of their expected income, taxes, deductions, and credits for the year. 

Employment Taxes

As an employer, you should make the necessary tax deductions and settle them in the employee’s behalf by withholding them from the individual’s paycheck and remit them accordingly to the IRS. Business tax deductions include federal, state, FICA and FUTA. 

Federal and state taxes are withheld from pay. However, the Social Security and Medicare taxes, which fall under the Federal Insurance Contributions Act (FICA) tax, and worker’s compensations are paid both by you and your employees. 

Also part of the employment tax is the Federal Unemployment Taxes (FUTA) where you are obliged to pay unemployment taxes to provide benefits to people who lost their jobs. Employers settle this based on the number of employees and the rate of unemployment. 

Self-Employment Tax

Self-employment tax is levied to self-employed professionals, including sole proprietors and freelancers to fund their Social Security and Medicare tax. These payments will contribute to their benefits coverage and hospital insurance. 

Schedule SE (Form 1040) must be filed accordingly, as no employer will be withholding their Social Security and Medicare tax. IRS requires taxpayers to settle their payments every quarter in order to fulfill their tax obligations. 

An individual is considered self-employed if any of the following grounds are met:

• If the declared net earnings from self-employment is $400 or more.
• If a church employee’s declared income is $108.28 or more

Excise Tax

Excise tax is a type of business tax that the federal government adds to products and services that are deemed harmful to people or the environment such as fuel, tobacco, and alcohol. IRS imposes the tax on the seller, who then passes it on to the consumers either as a per unit tax (e.g., gasoline or cigarettes) or a percentage tax (e.g., airport ticket).

Aside from adding excise tax on top of sales tax, it is also imposed on both federal and state levels. Excise taxes apply to alcoholic beverages, tobacco, firearms, airfares, telephone service, and many other products and services.

If all these types of taxes are too much to grasp, consider outsourcing your tax compliance responsibilities. For small business tax services, look no further than D&V Philippines. We'll help you get your numbers in order so you won't have to worry when the deadline arrives.

Thinking of taking the next step? Read our guide, Outsourcing: How to Make it Work, to find out how you can maximize your outsourcing partnership with us.