Small Business Tax

Unlike some other countries, taxation in US is rather a complex process involving different layers. Whether it is individual tax or business tax, one has to pay it to the multiple entities. Following are the entities:

1) Federal Government,

2) State Government, and

3) Regional entities.

To understand the complex proceedings of taxation in US, we have to first understand what is tax all about. It is a financial charge imposed on an individual or a legal entity by a state or any entity equivalent of a state, like tribes etc. In this modern system of taxation, tax is paid in money, but earlier it was also paid in kind.

There are broadly two types of taxes direct and indirect. Direct taxes are those, which are collected directly from individuals or organizations on which they are imposed. Whereas, indirect taxes are collected from someone other than the person on whom the tax is levied, e.g., sales tax etc.

Talking about the different layers of taxes first comes the Federal Government. It is primarily financed by individual and corporate income taxes. Earlier, it used to be funded via tariffs on imported goods. But now tariff represent a minor portion of the of the total revenues of the federal government. The taxes that come under Federal Government are

* Federal Income Tax

* Social Security Tax and

* Medicare Tax.

After this, comes the second layer, i.e., the state tax. US states have a plenary power to levy taxes on their citizens and activities within their borders as long as they donât infringe on federal powers. The state government is mainly financed by value-based property tax, i.e., the tax on real estate. Other taxes that the state government imposes are state income tax, state sales tax and excise tax.

The next layer is the city or county tax. Their purpose of imposing tax is to improve parks, schools and roads, pay for police and fire departments and other local services. Other than this, local government agencies like school districts also have the power to tax. The tax collected usually consists of property tax but many also include sales tax and income taxes.

Like individuals, businesses also pay taxes and small businesses are no exceptions. To pay taxes, a business has to acquire an EIN. It is Employer Identification Number, which a business needs to pay its taxes. All businesses paying wages to one or more employees, filing pension or excise tax returns or forms C or S corporations or partnerships have to obtain an EIN. If a sole proprietor has no employees, pension plans, or excise taxes then he can use his social security number to pay taxes and need not acquire an EIN.

The different types of taxes that small business has to pay are:

1) Withholding tax: Employers withhold taxes from employeesâ paychecks and send them to proper government agencies and other employer tax obligations.

2) Social Security & Medicare Taxes: In US, there is a federal system of old age, survivors, disability and hospital insurance. The federal government imposes social security tax, which takes care of the old age, survivors and disability insurance purposes, and the Medicare tax takes care of the hospital insurance.

3) Federal Unemployment Tax: Also known as FUTA, this tax along with state unemployment systems, provides for payments of unemployment compensation to workers who have lost their jobs. FUTA is paid only by the employer and is not deducted from the employeesâ wages. Employers have to pay a Federal and a State unemployment tax.

4) State Unemployment Tax: Just like Federal unemployment tax, it is also paid by the employer and is not deducted from the employeesâ paychecks. The rate of tax and wage limit is different for every State.

5) Self Employment Tax: This is the Social Security and Medicare tax for people who are self employed. The benefits of social security are available to self-employed persons in the same way as they are to wage earners.

6) State Taxes: All the states in US levies some or the other form of tax on small businesses. But there are some states where some business structures like sole proprietorship, either has very little tax or no tax at all.

7) Local Taxes: There are some local authorities which tax small businesses. They tax the properties like, machinery, equipment, furniture, supplies, leased equipment and others. There are certain cities and municipalities which levy income tax on any business operating within their borders.

8) Sales and Use Tax: Sales tax is added to the cost of a product or service and is usually paid by the customers and not the sellers. Most states or local entities impose general sales tax on products. Business owners collect these taxes and submitting it to the appropriate taxing authority. Businesses selling taxable goods or services has to obtain sales tax license from the state of operating.

Use taxes are imposed on sales price or rental charge for tangible personal property on which no sales tax has been paid. The common instance is buying something from one state and shipping it to another state.

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