TOPICS:
Which Taxes Affect Entrepreneurs?
Shoutout to Maria for requesting this topic…
I noticed different people have different perspectives as to what they mean when they think about taxes. And I can understand because there are several different taxes and that person may be just thinking about the particular tax that they're facing at the moment.
With that said, entrepreneurs are responsible for multiple taxes depending on a few different situations, but there are 4 main taxes that come to mind. The first tax they are responsible for is their income tax. On a federal level, the IRS requires entrepreneurs to report their income, so they can tax the entrepreneur based on how much money they made minus expenses. On the state level, the state the entrepreneur lives in and conducts business in may or may not require the entrepreneur to report their income. For example, I live in Texas, and Texas does not charge income tax.
The second most common tax entrepreneurs may be responsible for (from my perspective) would-be franchise tax. The federal government has nothing to do with franchise taxes, however, depending on the state you live in you may have to file and/or pay franchise taxes. For example, in Texas, if you register your business as an LLC, an S corp, a C Corp, or a partnership (and several other different registration types), Texas would require you to file your franchise taxes, but Texas will only tax you if your income exceeds the income limit they sent which is generally beyond $1 million. You can find the specific amount on the comptroller’s website. But regardless of whether or not you reach that minimum income threshold, Texas still requires you to file a franchise tax return.
The third most common tax entrepreneurs may be responsible for would be sales and use tax. This tax actually is not a tax that an entrepreneur officially pays out of pocket. Entrepreneurs are responsible for charging their customers sales tax, and then they are required to file a sales tax return and remit those sales tax amounts they collected to the Comptroller. So as you see, it's not an out-of-pocket cost for the entrepreneur. It's an out-of-pocket cost for their customers just like when they go to a store and are charged sales tax by that store. This mostly applies to entrepreneurs who sell products or if their sales fall into one of the other categories that the Comptroller may require them to charge, collect, and remit sales tax for. Generally, in Texas, for example, service-based businesses usually don't have to charge their customer sales tax and therefore would not need a sales tax permit.
The fourth most common tax entrepreneurs may be responsible for would be payroll taxes. This would apply to entrepreneurs who officially hire employees that work for their businesses. It does not apply to entrepreneurs who only hire other contractors who are self-employed. If the entrepreneur does hire employees, the federal government requires them to withhold taxes from their employees' paychecks and remit those taxes to the federal government. The entrepreneur also has to match some of those taxes. This means the amount the entrepreneur withheld from the employee, the entrepreneur would pay out of pocket the matching amount and remit both amounts to the federal government which is why hiring employees can become an expensive business expense. On the state level, the entrepreneur would be responsible for paying out-of-pocket unemployment taxes, which is calculated based on how much you pay each employee.
There are many other taxes that an entrepreneur could be responsible for paying depending on their particular situation, but the four that I listed above are the most common. PRO TIP: If you find yourself being responsible for any of those taxes and at any point you close your business or the tax is no longer required from you, you must follow the proper procedure to notify the federal or state departments to let them know, so they can officially close your account with them. If you don't let them know you've closed your business or you no longer need to charge or pay these taxes, they will continue to assume you are conducting business and will charge you an estimated amount based on what they think you would have owed. Don't let that happen to you…
I hope this article was helpful, and I look forward to hearing your suggestion for the next one.
Thanks for hanging out with me! If you found this information useful, Feel free to Share it...
Loma
SUBSCRIBE NOW...
To get notified of the latest blog post...you never know, it could be on a topic you really need to know about.
*** Please check your email to confirm your subscription.