727-530-0036 info@busadvisory.com
3 Common Types of Tax That All Business Owners Must Understand

3 Common Types of Tax That All Business Owners Must Understand

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-employment taxes

Self-employed individuals must generally pay self-employment (SE) tax as well as income tax.

SE tax is social security and Medicare tax:

  1. 12.4% for social security (old age, survivors, and disability insurance)
  2. 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.

Just ask our satisfied clients who we have helped with business tax management, accountancy services, financial statement preparation, and financial advice.

If you need assistance creating a personalized plan for you and your business, let’s connect today. We will get started with a free strategy session.

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.

Gross vs. Taxable Income: What’s The Difference?

Gross vs. Taxable Income: What’s The Difference?

As a business owner, it’s important to know the basics of tax. In addition to running the business, you’re responsible for ensuring that both state and federal taxes are properly paid out.

We previously covered the common terms of tax. Today we’ve decided to focus on an essential topic: gross income versus taxable income, and the difference between the two.

We think you’ll find that it’s going to go a long way in helping you to grasp the tax and finance aspects of your company and keep your finances in check.

Tax is complex, but rest assured: at Business Advisory and Accounting Partners we are proud to tell you that we are seasoned tax professionals and we are here to help.

What is gross income?

Gross income is your income before taxes and deductions are removed. It is not just from your wages and can come in other forms that are subject to taxation including rental income, dividends, bonuses, business income, gain from the sale of stock or property, and other sources.

All income is taxable unless the law states that it’s not. Some good examples of things that are not taxable under the Internal Revenue Code (IRC) include gifts and inheritance, scholarships, life insurance proceeds, and most disability income.

What are deductions?

Deductions are business expenses or deductions, and personal deductions such as state income taxes, mortgage interest, charitable contributions, student loan interest, etc.

What is taxable income?

Taxable income is the portion of your gross income on which you’re required to pay income taxes. Generally speaking, an amount included in your income is taxable unless it is specifically exempt by law. Taxable income must be reported on your return, and it is subject to tax.

Here’s the golden rule:

Gross income – deductions = taxable income

This means that your taxable income is your gross income minus all of the deductions allowed.

When you file your federal and state income tax forms, you’ll use your gross income as your starting point and then subtract deductions to deWtermine how much you’ll owe.

Your taxable income is also known as adjusted gross income (AGI), and after calculating this you’ll decide whether to take the standard deduction or itemize your taxable deductible expenses.

Worldwide income

Here in the US, we have a “worldwide” or “citizenship-based” individual tax system. Any income earned by US citizens or permanent residents (in other words green card holders) is taxed by the US government, no matter where it is earned.

Taxes paid to other countries may be credited against US taxes.

Tax rates

When it comes to tax rates, these will be different for ‘individuals’ and those who are ‘married filing jointly’. Also worth noting is that state income tax differs in every state, with some having a progressive system, others a flat tax, and a few with no state income tax.

Guiding you toward success

To run a business that thrives, you’ll need to optimize your business income, maximize deductions and credits, and minimize self-employment taxes. Our clients in the Tampa Bay area depend on us for this expertise. When you need an expert to guide you through the financial maze and toward success, we are here to help. 

We have expert knowledge and vast experience in business tax management, accountancy services, financial statement preparation, and financial advice.

So, you focus on the past, present, and future of your business and we’ll be your business advisors. Send your questions our way and let’s get started with a free strategy session.