by Mark | May 25, 2023 | Business, Tips
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:
- 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.
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.
by Mark | Oct 14, 2022 | Tips
The word ‘tax’ has a strange effect on people. Some find it boring; others find it confusing, and many find it scary.
Yet knowing the basics of tax is essential for your business to run smoothly and efficiently and be fully compliant. As a business owner, it’s your responsibility to ensure that proper books and records are kept, that your business is tax compliant, and that tax returns are completed. Failure to do so can result in serious consequences.
There is a lot to understand, but the team at FMA, CPA are seasoned tax professionals and are here to help. Let’s get to know the basics of tax efficiency. +We’ll start with common terms like gross income, deductions, and taxable income, then look at how taxes are calculated.
Common tax terms
1. Your gross income means your wages, interest, dividends, business income, prizes, awards, gain from the sale of stock or property, etc. In other words, gross income is all income from whatever source derived, and it includes amounts realized in any form whether money, property, or services, unless provided by law. A good rule of thumb is that everything is taxable unless the law states that it’s not. Some good examples of things not taxable include gifts and inheritance, scholarships, life insurance proceeds, and most disability income.
2. Deductions refer to business expenses/ deductions, and personal deductions such as state income taxes, mortgage interest, charitable contributions, student loan interest, etc.
3. Your taxable income is what your tax is calculated on, so it’s your gross income minus all of the deductions allowed. This is the number that your tax liability is calculated on.
So, how are taxes calculated?
Here in the US, we’ve got what’s called a progressive individual tax system, which means that all income is not taxed at the same rate. Higher levels of income are taxed at a higher rate, and lower levels of income are taxed at a lower rate.
There are tax brackets, and any income within this bracket is taxed at a particular rate. You’ve got your ‘marginal tax rate’ which is the rate that your next $1 will be taxed, and you’ve got your ‘effective tax rate’ which is the overall tax rate you’re paying on all of your income.
Remember, tax rates differ 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.
What other tax should you know about?
1. You’ll pay capital gains tax on the sale of investments and real estate, and this is taxed at lower preferential rates.
2. Single people earning over $125,000 or married people earning $250,000 will have an additional 3.8% tax applied to all investment income. This is called net investment tax.
3. Self-employment tax is where social security or Medicare taxes are applied to all self-employed income or profits.
Tax efficiency
Tax planning focuses on ensuring that you pay no more than your fair share of taxes. The goal of tax planning is to increase tax efficiency and reduce the overall effective tax rate paid on the business’s gross income.
So, if optimizing your business income, maximizing deductions and credits, and minimizing self-employment taxes sound good, we’re happy to help you achieve this.
As experts in business tax management, accountancy services, financial statement preparation, and financial advice, we can guide you. We’ll be proud to be your business advisors. We can answer all of your questions and help you to unlock the potential of your business.
We serve the Tampa Bay Area, and our clients know that they’re in good hands to manage all of their business tax needs and more. Let’s start with a free strategy session.
