Business Tax Terms: A Beginner’s Guide
We’re not going to sugarcoat this: business taxes are more complicated than personal taxes. There are significantly more types of taxes and filings to keep track of as a business, and a whole new vocabulary to learn as you navigate your company’s tax obligations.
The whole process can be intimidating, especially if you’re getting ready for your company’s first tax season. We’ve put together a list of the main terms to know.
Common Business Tax Terms
- Corporate income tax (state and federal) – When you think of taxes, you probably think of this one. These are the taxes that federal and state governments collect on income, due on 4/15 for individuals and C-corporations, and 3/15 for S-corporations and partnerships. It’s important to remember that even if your business did not have any income last year and does not owe income taxes, you’re still required to file.
- Automatic extension – State and federal income tax filings are due 3/15 for S-corporations and partnerships, and 4/15 for C-corporations….unless you get an extension. The IRS allows businesses to file for an automatic extension for six months, changing the filing deadline to 9/15 for S-corporations and partnerships, and 10/15 for C-corporations. There is no penalty for requesting the extension, and it’s standard process for many businesses to get one. However – it’s important to note that if you do owe taxes, you still have to pay the estimated amount by the original deadline. If your estimate is wrong, you can correct that in your actual filing.
- Estimated payment – A common misconception is that Tax Day is the day your income taxes are due. 3/15 or 4/15 are the deadlines to file your income taxes. But the IRS actually wants you to pay throughout the year. If you expect to owe more than $1000 in income taxes as a sole proprietor, partner or S-corporation shareholder, or if you expect to owe more than $500 as a corporation, you need to make estimated payments quarterly. Keep in mind that this only applies if you expect to owe income tax – if you don’t expect your business will make money this year, then you won’t have any estimated tax to pay.
- Payroll tax – Most of us are familiar with payroll taxes as employees – it’s the deductions for federal and state taxes, Social Security, Medicare, etc. As an employer, you’re responsible for withholding this tax from your employees’ paychecks, and passing that money on to the government. We recommend using a service like Gusto to handle this for you, rather than trying to do the calculations and withholding manually.
- 1099 – If you’ve done any contract work in the past, you may have received these tax forms. While you will withhold payroll taxes on behalf of your employees, you generally don’t withhold for contractors; they’re responsible for making those payments themselves. If you paid any US-based contractors, LLCs or lawyers $600 or more to do work for you, you have to report that payment to the IRS with a 1099-MISC form. You’ll also send a copy to your contractors, so they have that information for their tax returns.
- W-9 – Request for Taxpayer Identification Number and Certification. This is the form you send your contractors, to get their info so you can send 1099s to them and the IRS. You don’t have to send the W9 form itself to the IRS; this form is just for your own records, so that you have what you need for 1099s. We recommend that you never issue a payment without first collecting a W-9 – that way, you’re never scrambling at tax time to track down information for people you paid throughout the year.
- W-8 BEN and W-8 BEN-E – The W9 is for US contractors. If you paid a foreign contractor or entity during the tax year, you’ll need to use W-8 BEN (for individuals) or W-8 BEN-E (for an organization) instead. Like the W9, this is for your own records. You don’t send a copy to the IRS.
- K-1 – If you’re filing as a partnership or an S-corporation, you’ll need to issue these to your investors and shareholders. Similar to the 1099s you’ll send your contractors, the K-1 provides information to the IRS about the income your partners/investors will owe taxes on, and to your partners/investors themselves so that they can file their own taxes. K-1 forms are due to the IRS on 3/15.
- Franchise tax – Some states also have a franchise tax, which is essentially a tax on doing business in the state. This is different from the income tax: regardless of whether or not your business made money, you’re required to pay any applicable franchise taxes. A particularly well-known example is the Delaware franchise tax; any company that incorporates in Delaware must pay a minimum $175 tax and $50 filing fee.
The amount you might owe for franchise taxes, and how the amount is calculated, varies from state to state. The definition of “doing business” can vary too, so be sure to do careful research on what your company’s obligations might be (this is an area where getting help can be a good idea).
- City tax – Some cities, but not all, levy their own additional taxes on businesses. Depending on where you are, you might potentially owe this tax for each city you have a presence in. Note that having a taxable presence in a city is not the same as having a physical location there. For example, San Francisco’s business tax applies to any business “operating” in SF, even if they don’t have an official office location. If you have questions about what local taxes may or may not apply to you, do your research in advance of filing your taxes. A city’s website is a good first place to start; many have a finance or treasurer page with information about taxes.
- Gross receipts tax – Gross receipts mean all of a business’s income, regardless of where it came from – it could be sales, rent, licensing, interest, dividends, or even loose change found in the couch. Some states and localities use a tax on gross receipts as their business tax (San Francisco’s tax is one example). This is different from a sales tax, not only because it applies to income beside sales, but also because gross receipts taxes are paid by the business rather than the consumer.
- Sales tax – You’re familiar with this as a consumer – whenever you make a purchase, the seller collects this and passes it on to the state. If you have a small brick-and-mortar business like a restaurant, this is pretty straightforward. If you have an ecommerce business, however, with orders coming in from a number of states or countries, it can get complicated fast. You’ll need to collect and pass on sales tax for each state that you make a sale in. Rules for how this works, once again, vary by state. Rather than track it yourself, we recommend using an automated service like TaxJar or Avalara to help handle this for you.
- Value-added tax (VAT) – This is generally not used in the United States, but if you sell goods internationally (particularly in the EU) you may have encountered VAT. This is essentially a different approach to sales tax, one that applies taxes at each stage of production based on how much the value of the item increased. For the purposes of your business, however, there’s little difference from a sales tax. You’ll need to do the same tracking, collection, and sending of funds to the appropriate government.
It’s particularly important to take note of VAT if you’re a US-based ecommerce business with European customers. The EU will expect tax payments for your sales to its citizens, and if you did not collect VAT from your customers, you will need to pay the tax out of your profits.
Compared to filing personal income taxes, business tax is a process with a lot of moving parts. But it’s important to remember you don’t need to go it alone. If you’re concerned about your tax filings – or just about how much time it will take away from running your business – save time and sanity by getting a pro to help with tax preparation for your business.