Serving business owners since 2007Your business’s federal taxes may depend on your business’s structure (C corporation, S corporation, LLC, etc.) and many other factors.
Here are four types of federal taxes that small businesses are often subject to and where to find more information on them from the IRS. (We also recommend you always discuss your specific business with a tax attorney before making any tax-related decisions.)
Income taxes
Income taxes are the most common tax form and are based on your income.
Everyone pays these taxes, including small business owners (except partnerships, who file an informational return).
Federal income taxes are pay-as-you-go, meaning you are required to pay them as you receive income throughout the year. You pay them through either withholding or quarterly estimated tax payments, with specific filing forms depending on your business structure.
Different forms should be used when filing income taxes, depending on your business structure.
Here are some common business structures and the forms they use to file taxes:
- S corporations file Form 1120-S. This form reports income, deductions, and credits for the business.
- C corporations file Form 1120. This form reports the business’s income, deductions, and credits and helps the business owner determine income tax liability.
- Sole proprietorships use Form 1040 Schedule C. This form helps calculate the profit or loss of your business, which is included in your tax return.
- Partnerships file an informational return using Form 1065. Because a partnership passes profits and losses to its partners, this form helps calculate how much tax the partnership owes. It also shows each partner’s share of the income or loss.
- Limited Liability Companies can vote on how they want to be taxed. They can file as a sole proprietor using Form 1040 Schedule C, a partnership using Form 1065, or a C corporation using Form 1120.
A guide to choosing the right business structure
Your business structure can significantly affect liability, taxation, and day-to-day operations. What’s the best business structure? See our business entity chart.
Self-employment tax
If you run your own business, you must pay self-employment tax. This tax funds Social Security and Medicare programs.
Business owners pay self-employment taxes when they file their income taxes.
The amount owed to self-employment taxes depends on a business’s net earnings. The IRS requires non-church employees to pay self-employment taxes if net earnings exceed the pre-determined amount assigned by the IRS.
Church employees must pay these taxes if they were paid exactly or over $108.28, except for the Clergy. As of 2024, the self-employment tax rate is 15.3% of your net earnings.
Different business structures, such as S corporations, can benefit from self-employment taxes. Understanding these benefits or drawbacks is vital before deciding which type of corporation to form.
See this article from the IRS for more information on self-employment taxes.
Small business employment taxes
Small businesses also pay employment taxes for their employees. These taxes include workers’ Social Security and Medicare, federal income tax, and Federal unemployment tax (FUTA).
Employers withhold workers’ Social Security and Medicare taxes from their paychecks depending on their total payment and tax rate. Employers also withhold federal income tax from employees’ wages. Employers determine the amount they need to withhold by filling out Form W-4.
Under certain circumstances, employers must also pay FUTA taxes on 6% of the first $7,000 of an employee’s annual pay. If employers spend over $1,500 in wages or have employees working at least 20 weeks, they must pay FUTA taxes.
Two exceptions to this rule include household and agricultural workers, which have separate requirements. Unlike the other taxes, employers do not withhold this tax from employees’ pay. Small business owners should know about these taxes for budgeting and employee compliance.
Find more information on small business employment taxes from the IRS here: Employment taxes for small businesses
Excise taxes
Excise taxes are extra charges on certain goods, including gas, alcohol, and tobacco. These taxes affect businesses that manufacture or sell these goods by adding to the cost of products. They also affect specific business operations, the use of various equipment, facilities, or products, and if you receive payment for certain kinds of services.
You’ll need to check whether your business meets any of the current conditions as defined by the IRS.
Each type of excise tax requires a different tax form.
Here are three forms small businesses should know about to report excise taxes:
- Form 720 covers quarterly federal excise tax returns. It covers various excise taxes.
- Form 2290 is for heavy highway vehicles. It reports and pays the federal highway use tax.
- Form 8849 helps businesses get excise tax refunds on the sale of fuel.
Visit this article from the IRS to get a general idea of excise taxes, including the conditions in which they’re required and the associated reporting forms.
Each state has its own tax structure and filing requirements for small businesses. We recommend checking with a tax attorney familiar with tax issues in the state where you’re forming a corporation.
Find more information about federal business taxes at the IRS web site.
Before forming a corporation, be sure to consult with a lawyer and/or tax attorney to understand tax issues surrounding small businesses so you can make informed decisions.
