There are various federal taxes that may apply to your small business. The type and form of business you operate determines what taxes you must pay and how you pay them. At the federal level, several different taxes may apply.
The IRS defines an excise tax as a tax imposed on the sale of specific goods or services, or on certain uses. Federal excise tax is typically imposed on the sale of items such as tobacco, fuel, alcohol, tires, heavy trucks and highway tractors, and airline tickets. Many excise taxes are placed in trust funds for projects related to the taxed product or service, such as highway or airport improvements.
An excise tax may be imposed at the time of import, sale by the manufacturer, sale by the retailer, or use by the manufacturer or consumer. Some excise taxes are collected by a third party, which then must remit the taxes to the IRS in a timely manner. An example of a third-party collector of an excise tax is a commercial airline, which collects the excise taxes on airline tickets that are paid by airline passengers. Businesses that are subject to federal excise taxes must generally file Form 720, Quarterly Federal Excise Tax Return. Certain excise taxes, such as those owed to the Alcohol and Tobacco Tax and Trade Bureau, are reported on different forms.
Income taxes must be paid on business profits. How that tax is paid depends on how the business is structured. Most small businesses are pass-through entities, which means that the business's profits or losses are passed through to the owners and reported on their personal income tax returns.
Partnerships and multi-member limited liability companies (LLCs) generally file a partnership business tax return for informational purposes only. The individual partners and LLC members pay income taxes for their share of the income of the business. Note, however, that some LLCs elect to be treated as a corporation for tax purposes.
An S corporation files an S corporation income tax return for the business. Like a partnership, an S corporation's net income is divided among the owners, who pay tax on their share of that income individually.
A sole proprietor reports business profit or loss on a separate schedule filed with the sole proprietor's individual income tax return. Unless an election to be treated as a corporation has been made, the owner of a single-member LLC also reports the company's profit or loss directly on the owner's return.
Employers must generally withhold Social Security and Medicare taxes from their employees' wages and must pay a matching amount. Employers must also withhold the 0.9% additional Medicare tax on employee wages and compensation that exceeds a threshold amount.
Self-employment tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes paid for other workers.
Employers are required to report and pay the Federal Unemployment Tax Act (FUTA) tax separately from federal income taxes and Social Security and Medicare taxes. FUTA tax is not withheld from wages; employers are responsible for paying the tax.
Business owners should exercise extreme care when it comes to paying taxes since any mistakes on their part could result in significant penalties. For assistance, consult a tax professional.