Whether you’re starting a side-hustle or becoming a full-time entrepreneur, it is vital to be aware of the taxes you have to pay.
It may be that these taxes are similar to what you’d hand over as an employee, although in some cases they’ll be different.
The main factors affecting your tax bill as an entrepreneur are:
- the type of business you launch
- the state that you run your business in
The Type of Business you Launch
Around 95% of current U.S businesses, and even an higher proportion of new businesses, are launched as S corporations, partnerships, limited liability companies (LLCs), or sole proprietorships.
These are known as ‘pass-through businesses’, as profits are passed through to owners and investors, who are then taxed as individuals.
The other type of business is ‘C corporation’, which acts an independent legal entity separate from the people who own it, and is therefore taxed differently.
It’s very rare that a startup will launch as a ‘C corporation’ in 2018, so we’ll concentrate on the taxes that owners of pass-through businesses may pay.
Taxes for Entrepreneurs
Income Tax
Entrepreneurs will be required to pay income tax at the same rates they would as an employee.
The only difference is that their income will come in the form as company profits, instead of a salary.
There are seven states that do not charge income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. These states have alternative ways of raising taxes, which you’ll need to be aware of if you’re doing business there.
Franchise Tax
Many states charge an annual franchise tax for those creating a corporation or LLC. This is essentially an annual fee to maintain your legal entity.
Sales Tax
If you sell products from a commercial property, you’ll need to pay sales tax on your earnings.
This requires a sales tax certificate and quarterly payments to the IRS. The rules surrounding online stores are different and vary from state-to-state.
The five states that don’t charge sales tax are: Alaska, Delaware, Montana, New Hampshire and Oregon.
Employment Tax
If you employ other people, you’ll need to pay taxes to fund their rights as employee, such as Medicare and social security.
What is Estimated Tax?
The IRS requires you to estimate your annual taxes and pay them quarterly, usually in four equal installments. If you underpay your estimated tax, you’ll have more to pay when you file your annual tax return. If you overpay, you’ll receive a rebate at the end of the tax year.
As every U.S State has different tax rules, your best bet is to hire an experienced CPA in your local area. They will have the most up-to-date knowledge about how much tax you’re likely to owe and the tax-deductible expenses you have.
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