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Small business taxes 101

Building, developing, and operating a small business can be a challenging feat—especially in today’s uncertain and hyper-competitive economic environment. Small businesses can go a long way toward putting themselves in the best position to succeed by proactively handling their taxes. The right tax advisor for your small business can make a tremendous difference in both the short, and long run. Padgett has been a leader in tax services for small businesses for more than 50 years. We are committed to empowering entrepreneurs and small business owners with the knowledge, tools, and resources that they need to thrive. Here, you will find a guide to small business taxes, frequently asked questions, different types of taxes your small business could be required to pay, and more. If you have specific questions, please do not hesitate to contact our small business tax professionals.

Small businesses: defined

Small businesses are the backbone of the American economy. According to data from the Small Business Administration (SBA), there are approximately 32.5 million small businesses nationwide. Nearly half of all private sector employees in the United States (46.8 in 2020) were employed by a small business. So, how is a small business defined? The definition is more expansive and more complex than you might initially think. The SBA considers three key criteria:

Number of employees:

The SBA considers the number of employees a company has. For most industries, a business must have fewer than 500 employees to be considered a “small business”. Though, there are some important exceptions.

Annual revenue:

The SBA will also consider the revenue of the business. Once again, there is an industry-based standard. For example, an office of lawyers that earns more than $12 million per year is no longer a small business based on SBA standards—regardless of the number of employees.

Independently owned and operated:

A company that is wholly owned and controlled by a very large corporation cannot qualify as a small business for the purposes of SBA regulations. The SBA requires small businesses to be independently owned and operated.

Small businesses come in a wide range of different forms. They are structured in different ways, they operate in different industries, and they can have vastly different sizes. Though, all small companies share a very important common characteristic: They can benefit from a proactive approach to taxes. With the right support from a tax advisor, your small business will be in the best possible position to minimize tax liability and avoid tax problems.

Small Business Tax FAQs

Business taxes share some commonalities with individual taxes. There are also some very important differences. As a person who owns and operates a small business, your personal and professional tax obligations will depend on a wide range of different factors, including the structure of your business. For example, with some businesses—such as a partnership or S corporations income is taxed on a “pass-through” basis; whereas with other types of businesses, such as C corporations, income is taxed as corporate income. Perhaps the most notable difference between business taxes and individual taxes is that businesses must pay taxes on their net income. In contrast, individuals are taxed on their taxable income. In effect, this means that businesses can (and should) deduct certain expenditures, such as the cost of goods sold, before they calculate their taxes. For small businesses, thorough and well-organized financial and business records can make tax season much less complicated.

Taxable income is defined as “any gross income earned that is used to calculate the amount of tax you owe.” In other words, the amount of tax that a small business owes will depend on its taxable income. The basis of taxable income is actual income. The more that a small business earns in income, the greater its tax liability is likely to be. Of course, the reality is not quite that straightforward. Small businesses can reduce their taxable income—thereby reducing their actual out-of-pocket tax liability—in a number of different ways. How do small businesses reduce taxable income? Common strategies include:
  1. Utilizing all available tax deductions;
  2. Taking advantage of all available tax credits; and
  3. Make sensible, well-timed investments.
It is no secret that taxes are complicated. Taking an illegal deduction or an improper tax credit is not a smart strategy to save money for your business. Instead, doing so could lead to serious penalties, including financial sanctions and, potentially, even personal liability. A tax advisor with experience providing professional guidance and advice to small businesses can help to ensure that your company takes advantage of all tax deductions, tax credits, and investment opportunities to effectively reduce taxable income.

Federal, state, and local business taxes are not optional. Small businesses are legally required to make timely, full payments to resolve their tax liability. What happens if you do not pay your business taxes? Your business will almost certainly face immediate collection efforts and enforcement action from the IRS or a state/local tax authority. As far as federal taxes are concerned, a small business that fails to file or pay taxes can expect to receive one or more of the following notices from the IRS:
  • CP 2566: IRS has not yet received your tax return and has calculated your tax liability—inclusive of penalties—on its own.
  • CP 504: The IRS believes that your business has an unpaid tax balance. The agency is providing a Notice of Intent to Levy if you do not resolve the matter.

What actually happens if you are late on your small business taxes? The short answer is that your company is likely going to face penalties—and potentially enforcement action—from the IRS. Here is an overview of the common penalties for not filing/paying business taxes on time:
  • Failure to File Penalty: To start, you must file your tax return in a timely manner. There is a penalty of five percent of the balance due for each month a return is not filed—up to a maximum total penalty of 25 percent of the balance due. Always file your small business tax return even if you cannot pay on time.
  • Failure to Pay: The IRS charges a 0.5 percent monthly penalty for each month that taxes are left unpaid. Once again, this specific penalty maxes out at 25 percent of the total balance due. Though, the more a business can pay, the lower the total penalty. 
  • Interest: To be clear, those aforementioned penalties are not interest. The IRS will also charge interest on unpaid tax liability. The interest rate varies based on the federal interest rate at the time. There is no maximum cap on interest charged for unpaid taxes.
  • Enforcement Action: Beyond the financial penalties for not paying taxes, the IRS can take enforcement action against a small business. The IRS can garnish the wages of a delinquent taxpayer. This is especially important for self-employed small business owners. The IRS can also file a tax lien against real property or a tax levy against a bank account, including a business bank account. Finally, while less common, the IRS also has the power to pursue criminal tax fraud charges.

Yes—at least there can be depending on the type of business. As explained by the Internal Revenue Service (IRS), the tax deadline for certain businesses is actually one month prior to the tax deadline for individuals. For individuals, federal taxes are generally due on April 15th (April 18th in 2023 due to a holiday). However, the taxes for certain types of businesses are generally due on March 15th. Most notably, taxes are due a month earlier (March) for the following types of business entities:
  • Partnerships;
  • S-Corporations.
For sole proprietorships and single-member LLCs—the business categories that cover most self-employed people—the federal tax deadline is the same date as it is for individual taxpayers. For C-Corporations, the tax deadline will depend on their “calendar.” For C-Corporations with a traditional calendar, taxes are also due in April, on the same date as individual taxes. However, for C-Corporations that operate on a fiscal year (FY) calendar, taxes are due in June.

What types of businesses do we support?

Padgett is a tax partner for small businesses and small business owners. As small business owners ourselves, we have a deep appreciation for the challenges of owning and operating a company. Our tax advisors are committed to providing reliable, cost-effective services to clients. We work with all types of companies throughout the country and across industries. Our tax professionals for small businesses serve all types of entities, including:
  • S corporations
  • C corporations
  • Limited liability company (LLC)
  • Sole proprietorships
  • Business partnerships

Understanding the differences Between S and C corporations, LLCs, partnerships, and sole proprietorships.

A small business needs the right structure to succeed. The different types of business entities offer different advantages and disadvantages. Notably, tax treatment is one of the key considerations when selecting a business entity. Some business entities are taxed as pass-through entities. With S-Corporations and LLCs, any income generated “passes through” the business and is taxed as income of the individual owner. In contrast, a C corporation is taxed as its own distinct legal entity. If you have specific questions about the taxation of your small business, our tax advisors can help.

An overview of the types of taxes your small business could be required to pay

What types of taxes will your small business be required to pay? It depends on a wide range of different factors—including the structure of your business and the nature of your earnings. Here is an overview of some of the most common types of taxes that small businesses should be aware of:
  • Income Tax: Businesses are taxed on their income. C-Corporations are taxed at the federal corporate income tax rate of 21 percent. Pass-through small business entities—sole proprietorships, partnerships, LLCs, S corporations—are taxed at the owner’s individual tax rate of 10 to 37 percent.
  • Self-employment tax: The United States has a 15.3 percent self-employment tax. It is charged to cover Social Security and Medicare. A small business owner who works for themselves may be subject to this tax.
  • Employment tax/payroll tax: Employment taxes are also known as payroll taxes or FICA taxes. An employer is responsible for withholding an employee’s share of FICA taxes and paying its share of FICA tax contributions.
  • Excise tax: A unique type of tax that is an issue for some small businesses, an excise tax is imposed on taxes on various goods, services, and activities. Most often, it is an issue for manufacturers.
  • Sales and use: In the United States, most sales taxes and use taxes are imposed at the state and local levels. Small businesses need to be aware of their sales and use tax responsibilities.
  • Property tax: A small business that owns a commercial property (or residential real estate) is responsible for paying the property tax.
  • Estimated tax: Small business owners and self-employed individuals may be required to pay monthly estimated taxes.
  • Capital gains tax: A capital gains tax is imposed on profits realized from the sale of a non-inventory asset. The general capital gains tax rate is currently 12% to 28%, depending on your taxable income.
  • Dividend tax: Dividends received by an individual or small business are taxable income. The tax rate varies from 0 percent to 20 percent depending on the circumstances.

Padgett is a leader in tax services for small businesses

At Padgett, we provide reliable, comprehensive, and solutions-focused tax services to small businesses nationwide. If you have any specific questions or concerns about your tax obligations as a small business owner, we are here to help. Give us a call now or connect with us online to set up your confidential, no-obligation initial appointment with a tax professional for small businesses. At Padgett, we have strategically placed offices around the country to ensure there is a skilled business tax professional near your small business. Our team is ready to get started working with you today.

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