What taxes do small businesses pay?
Sole proprietors pay income tax, self-employment tax (covering both Social Security and Medicare), payroll taxes for any employees, and sales tax if they sell taxable goods or services.
LLCs taxed as sole proprietors pay the same taxes as sole proprietors, plus a state franchise or annual fee in many states.
S-corporations pay payroll taxes for employees (including reasonable compensation to owners), income tax on any taxable income at the shareholder level, sales tax if applicable, and a state franchise tax or filing fee in many states.
Can taxes be filed after the deadline?
Yes, you can file after the deadline, but penalties and interest may apply. Failure to file triggers a penalty of 5% of the unpaid tax per month, up to a maximum of 25%. In contrast, the failure-to-pay penalty is only 0.5% per month, also up to 25%. So, filing on time avoids the larger penalty, even if you can’t pay.
How are taxes calculated?
Taxes are based on your income minus deductions and credits, using rates that vary by income level, business type, and jurisdiction. Deductions reduce your taxable income, while credits reduce your actual tax bill dollar for dollar.
For example, a $5,000 deduction lowers your taxable income by $5,000, while a $1,000 credit directly cuts your tax bill by $1,000.
What if I can’t afford to pay my taxes?
The IRS doesn’t have to be scary. Normal, reasonable, human beings work at the IRS and understand that taxes can be tough. Most issues are handled with a letter, a payment plan, or just filing your return. If you owe more than you can pay, the IRS will usually work with you. Everything’s going to be okay.
Do I need an LLC to write off expenses?
No. You can deduct legitimate business expenses as a sole proprietor without forming an LLC. Expenses that are ordinary and necessary for your business are deductible, regardless of your business structure.