The Very Basics of Tax Obligations

Cliche alert:  They say that nothing is certain except death and taxes.  One thing that might be up for debate is whether it’s the taxes themselves that will kill you, and small business owners can be forgiven for thinking that today’s taxes come pretty close.

Sure, Oliver Wendell Holmes, Jr. used to say that he liked paying taxes because with them he bought civilization.  But he was also a U.S. Supreme Court Justice who made $292,368 per year in today’s dollars at the end of his tenure, so he could afford it.  And let’s just stipulate for the record that Mr. Justice Holmes probably never faced the working end of an IRS audit.

Trust us, it’s better to pay those taxes and complain about them than get behind and have to deal with the taxman when he’s angry.  The process alone will be punishment enough.  So how do you best stay on top of all of the taxes that your small business has to pay?  Here's a start:

1. Know the different types of taxes out there.

If you’re running a small business, then you’re going to be subject to some kind of tax somewhere.  What’s worse is that you aren’t going to know off the top of your head what each of those taxes is, and no one else is going to tell you until you’re already behind on a payment.  It’s your responsibility to figure out what your tax liability is and pay your taxes on time.  The applicability of those taxes will vary based on lots of factors, including your geographical location, where you are doing business, where your customers are located, the activity in which you’re engaging, and any number of arcane legal points written into the tax laws.

While we can’t give you an exhaustive list of taxes to which you’re subject--and even if we were theoretically capable of doing that, our lawyers would remind us to remind you that we aren’t giving legal or tax advice and that you should consult a qualified tax lawyer and accountant for professional advice specific to your actual circumstances as clearly outlined in our not-so-short disclaimer here--*breath*--below is a list a few general types of taxes that you should ask your accountant or your tax lawyer about:

(a) Income Taxes

Income taxes are the kind of taxes that you’re probably mostly--and unpleasantly--familiar with.  The U.S. federal government, most state governments, and even some local governments generally impose taxes on any income that a person earns.  The U.S. federal government and some states sometimes treat some partnerships, limited liability companies, and S corporations as flow-through entities that don’t have to pay taxes because the obligation to pay taxes flows through to the owners of those businesses.  But even then, a flow-through entity will likely still have reporting obligations that you don’t want to miss.

The IRS provides a brief overview of U.S. federal income taxes imposed on businesses here, but make sure you check into state and local tax law, too.

Bottom line:  To keep things simple, if you’re earning income, either as an individual or through a legal entity, then contact your accountant and make sure that you’re making all of your required filings and tax payments.

(b) Employment/Self-Employment Taxes

Employment and self-employment taxes actually include a lot of different types of taxes, including Social Security and Medicare taxes, unemployment taxes, and self-employment taxes.  Social Security and Medicare taxes are taxes that fund Social Security and Medicare benefits, and payment obligations actually fall on both employers and employees.  In other words, employers pay a portion, and employees pay a portion (although employers withhold that portion and pay it for them).  Unemployment taxes fund unemployment insurance and generally fall on the employer.  Finally self-employment taxes are similar to Social Security and Medicare taxes, but because the taxpayer is self-employed, there’s no employer to pay the employer’s share, so the self-employed person has to pay the entire amount.

The IRS provides a brief explanation of U.S. federal employment and self-employment taxes here, but make sure you check into state and local tax law, too.

Bottom line:  BEFORE you hire your first employee, contact your accountant to make sure that you get all of the appropriate tax forms so that you can collect all of the information from your employees that you’ll need to properly withhold taxes from payroll and make any additional tax payments required of your business.

(c) Excise Taxes

Excise taxes are probably the least familiar type of tax that you’ll have to deal with.  An excise tax is a tax imposed on various goods, services, and activities.  For a business, that might mean, for example, that you have to pay an excise tax because you’re producing a particular good even though you haven’t sold it or received any income for it yet.  It’s the activity that you engage in or the good or service that you produce that gives rise to the obligation to pay the tax.

The IRS provides a brief explanation of U.S. federal excise taxes here, but make sure you check into state and local tax law, too.

Bottom line:  When you decide to start a business, think through your business model, the goods and services that you’ll be selling, and the activities that you’ll be engaging in and talk to your accountant to make sure that you understand up front whether you’ll be subject to any excise taxes as the U.S. federal, state, or local level.

(d) State and Local Property Taxes

State and local property taxes are another category of taxes that you’re probably familiar with if you happen to own your own home.  Here it’s simply the ownership of property that gives rise to an obligation to pay a tax.  The most well known are real estate taxes, but be careful here.  Some state and local governments also impose property taxes on some forms of personal property.  For a business, for example, that might mean personal property like inventory or equipment.

Bottom line:  When you decide to start a business, think through your business model and any property that your business will own or possess and talk to your accountant to make sure that you understand up front whether you’ll be subject to any state or local property taxes.

(e) State and Local Sales Taxes

We’re really going out on a limb here, but state and local sales taxes are probably also a type of tax that you’re familiar with.  Like, you know, if you’ve ever bought just about anything other than food.  When you’re the merchant selling something subject to a state or local sales tax, you’ll have an obligation to charge the amount of the tax, collect it, and pay it over to the appropriate taxing authority.

Bottom line:  When you decide to start a business, think through your business model and any goods and services that your business will sell and talk to your accountant to make sure that you understand up front whether you’ll be subject to any state or local sales taxes.

(f) Withholding Taxes

All of that seems simple enough, right?  Well, hold on.  Sometimes you have to do something even when you aren’t the one doing something that gives rise to the obligation to pay a tax.  Even though you aren’t the person liable for paying the tax, you might have an obligation to withhold taxes from an amount that you would otherwise pay them and instead pay that amount to the IRS or some other taxing authority.

To take one example, suppose you’re paying someone else, either an employee or a counterpart in a business transaction, and what you’re paying could be considered income to that person.  Even though you aren’t earning income, U.S. federal, state, or local income tax law might deem you to be a withholding agent and impose on you to withhold a portion of the funds that you would otherwise have paid to your payee and pay them instead to the applicable taxing authority.

Why do we do it this way?  Well, a cynic might say that the greatest trick the Devil ever pulled was convincing the world that he didn’t exist, and this is in the same vein.  It’s a little harder for the person who bears the tax to see the tax when someone else is collecting it and sending it in to the taxman.  But at the end of the day, Uncle Sam is going to get his money one way or another, and it’s easier to get that money from an established business than a diffuse group of customers.  And that means you’re stuck figuring out when you need to withhold on payments to others.

Bottom line:  Contact your accountant before you start your business and make sure that you’re withholding and paying to the IRS or other taxing authority any amount that you’re required to withhold.

2. Call an accountant.

Yes, we sometimes like to state the blindingly obvious on this blog, but one way to stay up on your taxes is to hire someone else to do it and pay them to get it right.  A small business accountant should be familiar with all of the U.S. federal, state, and local tax filings that you’ll need to make and should be able to quickly find out if there’s an obscure tax that applies to your small business and not many others.  If you don’t want to figure out all of your tax obligations yourself, then get an accountant.

3. Keep a running spreadsheet of required tax filings and payments.

If you aren’t going to hire an accountant and instead intend to make your own tax filings and payments, then, after figuring out what tax filings and payments you need to make and when, build a spreadsheet that keeps track of all of the deadlines for your tax filings and payments so that you won’t miss any.  Check it early and often.