In business, it’s essential to understand the different types of tax that you should be planning for and paying.
Why? Because as business owners, you’re responsible for ensuring that your financial affairs are in order, and that includes taxes.
We previously covered the common terms of tax, as well as gross versus taxable income.
Today we are focussing on three common taxes: self-employment tax, state income tax, and local income tax.
Each can vary, depending on the state you live in, however, most individuals will have to pay a combination of the three.
Let’s get started!
Self-employed individuals must generally pay self-employment (SE) tax as well as income tax.
SE tax is social security and Medicare tax:
- 12.4% for social security (old age, survivors, and disability insurance)
- 2.9% for Medicare (hospital insurance)
This is usually taken out of your paycheck, but since you are no longer a W-2 employee, you’re now responsible for this yourself.
When you’re self-employed, you are paid the full amount you earn. Nothing is deducted for social security and Medicare tax but instead, you make estimated tax payments during the year to pay the self-employment tax and income tax. If you don’t make estimated payments, you pay the taxes when you file your return.
For anyone self-employed, it’s important to know your obligations so that you can avoid fees or penalties. It’s good to have an understanding of the various tax rules and regulations, including 1099s, quarterly tax payments, expense tracking, and home office deduction.
State income taxes
State income tax is a tax on income earned in that state. It’s similar to federal income tax, however, state income tax often funds state budgets rather than the federal government.
Every state is different when it comes to income tax. Some have progressive systems, while others have a flat tax, and eight states don’t levy a state income tax at all.
If you live and work in the same state, you likely need to file only one state return each year. However, if you have income-generating rental properties in multiple states, moved to another state during the year, or lived in one state and worked in another, you may be required to file more than one return.
Local income taxes
Local income tax is a tax that some local governments impose on people who live or work in a certain area. This local tax is in addition to state income taxes and federal income taxes.
Taxpayers are required to pay income tax in 41 states and many local municipalities. This tax funds public services such as education, parks, sewer maintenance, and garbage collection. Some local governments impose a school district tax, where all residents must pay the tax even if they work outside its boundaries.
As an employer, you must know about the local taxes where your employees work.
Masters of tax at your service
At Business And Accounting Partners, we know that dealing with taxes can feel overwhelming, and you may still have questions. Tax rules and regulations are complex, however as seasoned tax professionals, we are skilled at helping.
As your business advisors, we will ensure that your business is on track, with no surprises when tax time comes! We will talk to you about optimizing your business income, maximizing deductions and credits, and minimizing self-employment taxes.