The US tax system is renowned for its complexity and numerous nuances that must be studied thoroughly. Unlike personal tax returns, preparing and filing business taxation documents requires a lot more expertise and time. And tax compliance is one of the most important parts of doing business in the US.
The small business owner is responsible for paying taxes on all profits received by their organization. And even if the company has not made any income for a year, this must be reported to the IRS. Business entity structure directly affects the amount of taxes to be paid and the appropriate tax return form.
This guide will try to give a better understanding of taxes for small businesses in the US and the required tax filing documents that need to be prepared and submitted.
Business Taxes in the USA
Historically, corporate taxes in America are divided into three levels:
- Federal taxes;
- State taxes;
- Local taxes.
Federal taxes make up the "weightiest" part of your tax burden. That said, when it comes to federal taxes (and sometimes state and local taxes), typically, you may be liable for five types of business taxes. These are:
- Income Tax: The fee you pay on the earnings formed by your business.
- Self-Employment Tax: A charge you pay as a self-employed person to cover Social Security and Medicare taxes.
- Employment Tax: Additionally acknowledged as a “salary tax”, this is the tax you deduct from employees' paychecks (if you have any) for federal income taxes, Social Security taxes, Medicare taxes, and federal unemployment taxes.
- Excise Tax: A charge you pay if your business involves trading with certain goods/services: fuel, heavy trucks, tractors, etc.
- Property Tax: This expense you pay on any commercial property, land, or real estate owned by your business. This kind of charge is regulated on a regional level considering your business location.
State and Local Taxes
As for the other two levels of taxes, US tax laws pertaining to small businesses can vary greatly from state to state and city to city. This, in turn, means that state and local taxes will be unique to your business depending on its location. But, for Clevver, the location of your business doesn’t matter at all, we can help you register the US company in ALL 50 STATES!
The following is information about typical state and local taxes for small businesses. It is prudent for an entrepreneur to consult with the IRS both of the state and municipality where their business is located to define the precise taxes to be paid out.
Most often, the state and city in which the business is situated will require the small business owner to pay Income and Employment taxes. These are the most common fees.
As with federal taxes, state income tax liability is determined by the structure of the business, its legal form. For instance, Corporations pay and report taxes separately from their owners, their income is unrelated and they use different tax returns. At the same time, Sole proprietors report their personal and business income on a single form.
Having employees affects your tax liability to the state and municipality greatly. If there are any, the business owner-employer will essentially be responsible for paying State labor taxes (workers' compensation insurance, unemployment insurance, and temporary disability insurance taxes) and Withholding income tax from employees. Again, these may vary from state to state and city to city.
45 States have a Sales tax demand if you sell goods/services. In this case, the business owners are responsible for estimating, gathering, and proclaiming Sales tax.
Since there is a great variety of state and local taxes, it is important to take into account also the certain location of incorporation in the USA. Meaning, that local taxes can vary within the state, depending on the area or city that a company is located. Also, the filing of the local taxes is needed to be filed together with the state declarations.
Types of Business Entities and Tax Return Forms
As has been mentioned above, the organizational form of your business will determine your tax burden. It affects the types and amount of taxes to be levied. Also, a business entity implies definite tax form samples to be filed with the government agencies.
The forms you use to file your federal tax return will vary depending on whether your business is structured as a Sole proprietorship, Limited liability company, S-corporation, C-corporation, Partnership, etc. After calculating all your income and paying the prescribed charges, these will be the forms that you will need to fill out. Additionally, each form has a filing date:
- A sole proprietorship and single-member LLC write down Schedule C and file their tax statements on April 15 for the past year.
- An LLC with more than one member submits its Form 1065 with Schedule K-1 for each shareholder of the LLC. They are due March 15 for income earned in the prior year.
- Partnerships also file (for each partner) a Form 1065 with Schedule K-1 on March 15 or the 15th of the third month after the end of your company's tax year.
- C-corporations fill out Form 1120. The deadline for filing tax records is April 15 or four months after the end of their tax year.
- S-corporations submit Form 1120S with a Schedule K-1 for each part-owner. These returns are due on March 15 or three months after the expiration of the tax year.
- Self-employed individuals pay taxes quarterly on Form 1040-ES. Filing dates: April 15, June 15, September 15, and January 15 accordingly.
The situation with the choice of the appropriate form for tax filing has a couple of more nuances. The selection of the latter is also affected by the "resident" or "non-resident" status of the owner of the organization. For example, an LLC with more than one member, owned by a foreigner, is required to file Form 5472 + 1120, FBAR, and 1040-NR.
Important! Forms 1120 and 5472 are only filed together, with 1120 serving as the cover page. Your LLC must have an EIN to be able to complete these forms. The deadline to file Form 5472 is April 15.
Also, keep in mind that companies in the US must prepare not only tax returns but also Annual Reports. With such a variety of dates and documents to be filed with state agencies, it's easy to get confused and lost. To keep your company always up to date and have no problems with filing the relevant papers on time, Clevver has developed the Clevver Compliance Center — a new service in the Clevver's family of digital products. This web app will help keep everything under control and not miss any important dates from sight, such as, for instance, the renewal of your US Registered Agent subscription (it must be renewed annually). The Clevver Compliance Center is available FREE OF CHARGE.
Determining tax obligations and filing requirements based on the type of company in the US is difficult and time-consuming.
In order to compile the necessary documents for small business tax filing and annual reports, it is vital to keep detailed accounting records throughout the year, documenting transactions, etc. This, of course, is not easy and requires a lot of resources. That's why Clevver has created its new product, the Compliance Center, to make your entrepreneurship a little bit easier.
Also, remember that our specialists can assist you with your company incorporation in any of the 50 states of the United States of America. Learn more here.
DISCLOSURE NOTICE: Any legal or tax advice in this communication (including any attachments) is for information purposes only and is not intended to be used, and cannot be used against Clevver or its Sender. The sender is neither an Accountant nor a Lawyer and cannot be made liable. Please, contact your tax accountant for individual consultation. Clevver does not provide any legal advice itself. Clevver works together with a network of lawyers and tax advisors that provide all necessary individual legal advice.