If you started your business within the last year, you may feel a little lost heading into tax season. The ways in which businesses are taxed at the state and federal level can be confusing, in part, because various kinds of businesses are all taxed differently.
Over the next two posts, we’ll try to clear up some confusion. Specifically, we’ll discuss different types of federal taxes that you may need to pay on behalf of your business.
Business structure determines how taxes are reported
No matter what type of business structure you have, you will be paying federal income taxes. But the type of business you run does have an effect on how those taxes are reported and paid. If your business is a sole proprietorship, for instance, your business income will be reported on your personal income tax return. If you own a limited liability company (LLC) or similar entity that is distinctly separate from your personal finances, you will file a separate return on behalf of your business.
How income taxes may be paid
Business income taxes can be paid at three different times (depending on the requirements specific to your situation). Many businesses are on a pay-as-you-go schedule. In other words, you basically pay tax on income as you receive it (similar to employee income tax withholding).
Another way to pay is to make regular, estimated payments. Some business owners calculate and pay their estimated taxes on a regular basis (often quarterly). You may also have to pay estimated tax if you will likely owe more than the amount being automatically withheld. For more on the specific rules of estimated taxes, feel free to read this page on the IRS website.
There is a potential third time to pay taxes: When you file your return. This is only an option for businesses that do not need to pay estimated taxes or pay through withholding.
Please check back later this week as we continue our discussion about federal business taxes.