Calculating your taxes as a small business owner can be complicated if you do not have the help of an accountant or a savvy bookkeeper. The taxes you will be responsible for can vary depending on how small your business is, how many people you have working for you, how much you made in profits, how much you paid out in expenses, and how much depreciation the objects you have obtained.
These all factor into how much you will owe at the end of the year. You may not even be aware that you should make payments to the IRS throughout the year to cover Medicare and Social Security costs.
So, that means that until you file your taxes, there is no way to tell exactly how much your small business will owe, but there are some ways to estimate it close enough to give you a way to budget the amount for the next quarter. Let’s take a look.
Type Of Entity
The way that you set up your business will make a sizable difference in how much your taxes will be. There are five ways you could have set it up, with the main one being the sole proprietorship. This would be the designation the IRS would give you if you did not pick something different when registering your business.
- C-Corporations – These big corporations pull in a ton of income every year. You may not be in this section of the tax brackets since you are a small business owner, but if you grow to match the giant companies of the word, you will have to know. This bracket will pay a straight 21% of their profits in taxes, and the shareholders that get dividend checks will also have to pay taxes from it.
- S-Corporations – An S-Corporation is set up much like the big dog above, but there are never more than 100 shareholders at a time. This level is achievable for most small businesses that make a profit and grow throughout the nation. The tax brackets here will put you at a percentage of your taxable income, just like when you file personal taxes.
- Limited Liability Company (LLC) – This type of business entity is formed in such a way as to ensure that the owner, or owners, are not liable for any debts incurred by the business. This is in the same tax bracket as the S-Corporation, a set percentage of your taxable income.
- Partnership – When two or more people enter into a business as partners, this entity needs to be formed. It is a business in which each owner pays an equal amount for its expenses, but they also get equal shares of the profits. The company is not taxed, but each owner must add all their earnings or losses onto their personal tax returns.
- Sole Proprietorship – This is likely the small business entity you decided to go with. This business only has one owner that is responsible for all its expenses. They are also the only ones that obtain any of the profits. This business will have to pay the same taxes as private taxpayers.
The entity that you decide to form will make a difference in how you are taxed, even though all of them but one are in the same tax bracket. You can always plug your numbers into a self-employment tax calculator if you want to see where you are at for the year. If not, at the end of the year, the exact amounts owed or gained will become apparent when you file the actual amounts owed.
The only business required to pay more taxes is the C-Corporations with loads of money, many shareholders, and many people to answer to. The others will all be in the same brackets you are used to paying as an individual taxpayer. The average amount taken out is around 20% of the taxable income, so you can easily estimate what you will be owing.
If you are confused about taxable income, it is the profit amounts minus all the expenses. It is that easy, then multiply that amount by twenty percent to get an estimated tax payment that you will need to make by the end of the year.