Business Taxes: Different Types of Taxes

Running a business involves more than managing customers, employees, and expenses. Business owners also need to understand their federal tax responsibilities and know which taxes may apply to their business.

The type of business you operate generally determines which taxes you need to pay and which tax forms you must file. The IRS identifies five main categories of business taxes: income tax, estimated tax, self-employment tax, employment tax, and excise tax.

Different Types of Business Taxes

1. Income Tax

Most businesses have federal income tax filing requirements. However, the specific return you file depends on how your business is structured. Partnerships generally file an information return, while other business structures have different income tax filing requirements.

Federal income tax works on a pay-as-you-go basis. This means taxes generally need to be paid as income is earned throughout the year rather than waiting until the annual tax return is filed.

For employees, income tax is typically withheld from their paychecks. Business owners and self-employed individuals may instead need to make estimated tax payments if their income is not sufficiently covered through withholding.

If you are not required to make estimated payments, any remaining tax due can generally be paid when you file your annual return.

2. Employment Taxes

Hiring employees brings additional tax responsibilities for business owners. Employers generally need to withhold certain taxes from employee wages, pay applicable employer taxes, and file the required tax forms.

Employment taxes generally include:

• Federal income tax withholding
• Social Security and Medicare taxes
• Federal Unemployment Tax Act (FUTA) tax

Employers also have responsibilities related to reporting employee wages and taxes. For example, employers generally prepare Form W-2 to report wages and other compensation paid to employees.

Payroll tax responsibilities can become complicated, especially as a business grows. Keeping accurate payroll records and making required deposits on time can help businesses stay compliant.

3. Self-Employment Tax

Self-employment tax primarily covers Social Security and Medicare taxes for individuals who work for themselves. These payments help contribute to eligibility for certain Social Security and Medicare benefits.

Generally, you must pay self-employment tax and file Schedule SE with your federal income tax return if your net earnings from self-employment are $400 or more.

There is also a special rule for certain church employees. If you have church employee income of $108.28 or more from a church or qualified church-controlled organization that has elected an exemption from Social Security and Medicare taxes, self-employment tax may apply.

Self-employment tax rules can vary in certain situations. Special rules may apply to groups such as fishing crew members, notaries public, certain government employees, and certain foreign workers.

If you are self-employed, understanding both your income tax and self-employment tax obligations is an important part of managing your business finances.

4. Estimated Taxes

Estimated tax payments are generally used when income is not subject to enough withholding. This can be particularly important for people who are self-employed or operate their own businesses.

Estimated taxes can cover both income tax and self-employment tax, along with certain other taxes reported on a tax return.

Because business income can change during the year, business owners should keep track of their income and expenses and review their estimated tax payments regularly. Paying too little or paying late can potentially result in a tax penalty.

For self-employed individuals, estimated tax is commonly used because there is no traditional employer withholding taxes from their business income.

5. Excise Tax

Excise taxes apply to certain products, businesses, activities, equipment, and services. Whether your business is responsible for excise tax depends on what your business does and the specific transactions involved.

For example, excise tax requirements may apply to businesses that:

• Manufacture or sell certain products
• Operate certain types of businesses
• Use specific equipment, facilities, or products
• Receive payment for certain services

Form 730 and Form 11-C

Businesses involved in wagering activities may also have federal excise tax responsibilities.

Form 730 is used to calculate and report federal excise tax on wagers for businesses that accept wagers or conduct wagering pools or lotteries.

Form 11-C is used for occupational tax and registration related to wagering activities.

Motor fuel is another major area within the federal excise tax system.

Form 720

Businesses that are subject to certain federal excise taxes may need to report them using Form 720, Quarterly Federal Excise Tax Return.

The taxes reported on Form 720 cover several areas, including environmental taxes, communications and air transportation taxes, fuel taxes, and certain taxes involving heavy trucks, trailers, tractors, and manufactured products.

Form 2290

Certain heavy highway vehicles may be subject to a federal excise tax. Form 2290, Heavy Highway Vehicle Use Tax Return, is used to report the tax on qualifying trucks, truck tractors, and buses used on public highways.

The tax generally applies to vehicles with a taxable gross weight of 55,000 pounds or more.

Why Business Taxes Matters?

Business taxes are not the same for every business. Your business structure, income, employees, activities, and the products or services you provide can all affect your federal tax responsibilities.

For this reason, business owners should not wait until tax filing season to think about taxes. Keeping organized financial records, monitoring income and expenses, and understanding which tax payments and forms apply to your business can make tax management easier throughout the year.

If you have questions about which business taxes your company needs to pay, consider speaking with a tax professional who can discuss your specific situation and explain your filing and payment responsibilities.

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