Business Tax Laws: An Overview

Everyone knows the daunting feeling that comes along with the word taxes. It means it’s time to dredge up all the paperwork, receipts, and forms to sort out and file to the IRS. It’s complicated enough for an individual, but business taxes are even more complex. Maybe you just started a business or are working independently and are unsure what your taxes will look like this year. This article will break down some of the common business tax requirements and get into what types of businesses need to file. We’ll also discuss what happens if you don’t pay and how a lawyer may be of service to your business tax needs. 

Business Tax Basics

In the United States, all businesses must report their profits and employees' income and file yearly taxes. The IRS uses taxes to support a number of programs, such as Social Security and Medicare. There are a variety of different tax types that might be required for your business depending on the type of business and the goods or services you provide, which we will break down in the next section.  

The Four General Business Taxes

There are four general types of taxes that you might have to pay depending on what kind of business you operate. Those four types of taxes are income, self-employment, employment, and excise tax. Below we’ll break them down to give you a better idea of what might be required for your business.

1. Income Tax: Excluding partnerships, all businesses must pay income taxes.

2. Self-Employment Tax: Self-employed individuals pay this tax for Medicare and social security benefits.

3. Employment Taxes: If you are a business owner and have employees, you are responsible for employment taxes such as social security, Medicare, and federal unemployment.

4. Excise Tax: Excise taxes are placed on a number of specific goods and services, such as fuel, airline tickets, heavy trucks and highway tractors, indoor tanning, tires, and tobacco.

Corporation Tax

Corporations are treated much like individuals and pay income taxes on their profits. Those taxes are based on the profits a corporation makes after expenses have been deducted. However, unlike individuals, corporations are required to pay estimated tax payments on a quarterly basis. Splitting up taxes by quarter helps to avoid a high tax bill at the start of the next year. Further, corporations may owe taxes on dividends earned as income can be taxed both at the corporate and personal levels. 

Corporations have the ability to reduce the overall cost of their taxes through deductions. Some common deductions are employee salaries, health benefits, tuition reimbursement, bonuses, and real estate intended for generating income.

Non-Profits

Despite being issued a non-profit status, it is still possible for an organization to owe taxes on unrelated business items. Unrelated business income is defined as income from a trade or business that is not related to the organization's exempt purposes. For instance, a church that sells parking places during sporting events would have to pay taxes on that income as it does not relate to the church’s purpose of tax exemption. If the organization makes a $1,000 minimum gross income, it must file unrelated business income tax (UBIT).

Partnership Taxes

Partnerships are a unique type of business as they do not pay income tax like other types. Instead, they report income, deductions, gains, and losses through their personal tax return. Each partner will report their share of the income and loss when filing federal income taxes. Federal income taxes are due on or before April 15th each year (otherwise known as Tax Day). 

Self Employment Taxes

Once their gross income reaches $400, self-employed individuals are required to pay estimated taxes quarterly, as well as file an annual return. If the taxes are not paid, the individual will not receive credits for Social Security benefits such as retirement or disability. Further, the IRS can still impose penalties or pursue criminal charges.

As stated above, self-employed individuals pay an SE tax (self-employed tax). This tax acts as social security and Medicare tax for individuals who work for themselves. Payment of this tax qualifies individuals for social security benefits, retirement benefits, and Medicare if needed. 

Estimated Tax

When you work a normal hourly or salary position, taxes are withheld from each paycheck to be paid as you earn them. However, you must still pay income taxes if you are self-employed, an independent contractor or make money from interest or dividends. This is done through estimated payments. Estimated tax is used to pay for items such as income or self-employment taxes throughout the year. According to the IRS, the estimated tax year is divided into four payment periods listed below. Just like income tax, estimated payments must be made on time and accurately to avoid penalty charges from the IRS. 

Estimated tax payment due dates are listed as follows:

• January 1 to March 31 – April 15

• April 1 to May 31 – June 15

• June 1 to August 31 - September 15

• September 1 to December 31 – January 15 of the following year

What Happens if I Don’t Pay Business Tax?

We’ve all seen TV shows where the big corporate partner gets arrested for tax evasion or some other money scheme, and it tears the whole business apart. But is that really how it goes down? While there are penalties for unpaid taxes, it would take many years of fraud and tax evasion to have a real cinematic takedown. In reality, once the IRS discovers the unpaid tax, they can impose a penalty charge, and the outstanding debt will begin accumulating interest. The interest rates for overdue taxes change quarterly and were reported at 7% for the latest quarter. The failure-to-pay penalty is one-half of one percent each month, up to 25% maximum. 

If the business can prove to the IRS that it made every effort to generate income by expending only necessary funds and still found itself in economic trouble, then it may be able to avoid penalties for delinquent taxes. However, this requires taxes to be filed. This is a great opportunity for a lawyer to step in and assist you in formulating a plan or reduction of the taxes, which we will get into a little more in the following paragraph.  

Do I Need a Tax Attorney if I Didn’t Pay Business Tax?

If you have filed your business taxes but are unable to pay or have not yet paid, it may be in your best interest to contact a tax attorney. The attorney will step in and communicate on your behalf with the IRS to negotiate your desired outcome. This could be setting up a payment plan or extension, it may also be countering the debt in cases where the debt seems incorrect, or one partner has found themselves responsible for the tax debt due to their partner's negligence. An attorney may be your best option to avoid criminal charges, further penalties, and interest. Expertise.com has you covered with a directory of local tax attorneys to help your business stay compliant and up to date with the IRS.