Small Business Taxes for Beginners & New LLC Owners

Summary

This video script offers a comprehensive guide for new business owners on understanding small business taxes. It covers various tax types, including individual income, corporate income, payroll, and self-employment taxes. The script explains the differences in tax obligations for entities like sole proprietorships, LLCs, partnerships, S corporations, and C corporations. It also outlines steps for calculating and paying taxes, highlights common tax deductions and credits, and emphasizes the importance of compliance to avoid penalties and audits.

Takeaways

• 📊 Small business taxes can be divided into three main types: taxes on income earned, taxes on purchases, and taxes on owned assets.
• 💼 Entrepreneurs must manage their own tax payments, unlike employees whose taxes are handled by employers.
• 🏛️ C corporations are the only business entities exempt from individual income taxes but are subject to double taxation.
• 🧾 Payroll taxes apply to businesses with W-2 employees, requiring both the employer and employee to share in the tax burden.
• 🛡️ Self-employment taxes cover both Social Security and Medicare contributions for sole proprietors, LLC owners, and partnerships.
• 🏢 S corporations can help avoid some self-employment taxes, but they require careful consideration and enough income to make it worthwhile.
• 📅 Business owners must make quarterly estimated tax payments to avoid penalties.
• 🛠️ Business tax deductions can greatly reduce taxable income and include expenses like wages, travel, office supplies, and equipment.
• 🔍 Tax credits, such as the R&D credit and those for hiring veterans, provide dollar-for-dollar reductions in tax liability.
• ⚖️ Staying compliant with the IRS involves following LLC rules, accurate bookkeeping, meeting tax obligations, and protecting customer data.

Q & A

What are the three main types of small business taxes?

The three main types of small business taxes are taxes on income you earn, taxes on what you buy, and taxes on what you own.

Who is responsible for paying individual income taxes?

Everyone, except for C corporations, is responsible for paying individual income taxes. This includes sole proprietorships, single-member LLCs, partnerships, and S corporations.

What is the self-employment tax rate, and who has to pay it?

The self-employment tax rate is 15.3%, and it applies to LLC owners, sole proprietors, and general partnerships. This tax covers Social Security and Medicare taxes, which self-employed individuals must pay in full.

How does the C corporation tax differ from other business entity taxes?

C corporations pay a flat federal corporate income tax rate of 21% and may also pay a state corporate tax, depending on the state. Unlike other entities, they are not subject to individual income taxes, but they are subject to double taxation if profits are distributed to shareholders.

What are quarterly estimated tax payments, and how are they calculated?

Quarterly estimated tax payments are payments made by business owners to cover their annual tax liability. They are calculated by adding the total taxes owed, including self-employment taxes, and dividing that amount by four. This helps to avoid penalties for underpayment.

When do quarterly estimated tax payments need to be made?

Quarterly estimated tax payments are typically due 15 days after the end of each calendar quarter. Specific deadlines are set by the IRS for each tax year.

What is a common consequence of failing to make quarterly estimated tax payments on time?

Failing to make quarterly estimated tax payments on time can result in an estimated tax penalty from the IRS, which is essentially a late fee.

What is the advantage of electing to be taxed as an S corporation?

Electing to be taxed as an S corporation allows business owners to avoid paying self-employment taxes on distributions. However, the election may be costly and is typically recommended for businesses with at least $60,000 in net profit.

What are some common business tax deductions that can lower a business’s taxable income?

Common business tax deductions include employee expenses, travel expenses, office expenses, equipment purchases, and business credits such as the research and development tax credit, among others.

What are some tips for staying compliant with the IRS as a small business owner?

To stay compliant, business owners should follow LLC rules, keep accurate records, fulfill tax obligations, follow employment laws, protect consumer privacy, and obtain necessary licenses and permits.