USA Taxation of Small Businesses: A Comprehensive Guide

Small businesses are the backbone of the American economy, but they also face many tax challenges and obligations. This article provides an overview of the various federal, state, and local taxes that small businesses have to deal with, as well as the tax deductions and credits that they can take advantage of. Here is what you need to know if you run a small business in the USA, with a list of resources for learning more.

What is a small business for tax purposes?

The definition of a small business for tax purposes depends on the type of tax and the tax authority. Generally speaking, a small business is one that has:

• Less than $10 million in annual gross receipts, or
• Less than $5 million in average annual gross receipts for the preceding three years, or
• Less than 100 employees, or
• Less than $1 million in assets¹

However, these thresholds may vary depending on the specific tax provision, industry, or jurisdiction. For example, the Small Business Administration (SBA) has different size standards for different industries, ranging from $1 million to $41.5 million in annual receipts, or from 100 to 1,500 employees². The IRS also has different definitions of a small business for different tax credits, such as the research credit, the work opportunity credit, or the employer health care credit³.

Therefore, it is important to check the relevant tax rules and regulations to determine if your business qualifies as a small business for tax purposes.

What are the types of taxes that small businesses have to pay?

Small businesses are subject to various types of taxes at the federal, state, and local levels. These taxes can include:

• Income tax: This is the tax on the net income or profit of the business. The tax rate and filing requirements depend on the legal structure of the business, such as sole proprietorship, partnership, corporation, or limited liability company (LLC). The federal income tax rates for small businesses range from 10% to 37% for individuals, and from 15% to 21% for corporations⁴. State and local income tax rates vary by location and may range from 0% to 13.3%⁵.
• Self-employment tax: This is the tax on the earnings of self-employed individuals, such as sole proprietors and partners. It consists of Social Security and Medicare taxes, which are normally split between employers and employees. Self-employed individuals have to pay both the employer and employee portions of these taxes, which amount to 15.3% of their net earnings⁶.
• Employment tax: This is the tax on the wages and salaries of employees. It consists of Social Security and Medicare taxes, federal income tax withholding, and federal unemployment tax (FUTA). Employers are responsible for withholding and paying these taxes to the IRS, as well as reporting them on Form 941, 943, or 944. Employers also have to pay state and local unemployment taxes, workers’ compensation taxes, and disability insurance taxes, depending on the location and industry of the business⁷.
• Sales tax: This is the tax on the sale of goods and services. It is imposed by most states and some local governments, and collected by the seller from the buyer. The sales tax rates vary by state and locality, and may range from 0% to 9.53%. Some states also impose a use tax on the purchase of goods and services from out-of-state vendors, which is equivalent to the sales tax rate in the buyer’s location.
• Excise tax: This is the tax on the manufacture, sale, or consumption of certain goods and services, such as alcohol, tobacco, gasoline, air transportation, or indoor tanning. It is imposed by the federal government and some state and local governments, and paid by the producer, seller, or consumer of the product or service. The excise tax rates vary by product or service, and may be a fixed amount per unit or a percentage of the price.
• Property tax: This is the tax on the ownership or use of real estate and personal property, such as land, buildings, vehicles, equipment, or inventory. It is imposed by state and local governments, and paid by the owner or user of the property. The property tax rates vary by location and type of property, and are usually based on the assessed value of the property.

What are the tax deductions and credits that small businesses can claim?

Small businesses can reduce their tax liability by claiming various tax deductions and credits that are available to them. These include:

• Business expenses: These are the costs that are incurred for the operation of the business, such as rent, utilities, supplies, advertising, travel, meals, entertainment, etc. These expenses are generally deductible from the gross income of the business, as long as they are ordinary and necessary for the business. However, some expenses are subject to specific rules and limitations, such as depreciation, amortization, interest, home office, vehicle, etc.
• Business losses: These are the excess of the business expenses over the business income in a given year. These losses can be used to offset other income of the business or the owner, or carried forward or backward to other tax years, depending on the legal structure of the business and the amount of the loss.
• Business tax credits: These are the amounts that directly reduce the tax liability of the business, dollar for dollar. There are many tax credits available to small businesses, such as the research credit, the work opportunity credit, the employer health care credit, the small employer pension plan startup credit, the disabled access credit, the energy efficiency credit, etc. However, these credits are subject to specific eligibility criteria and limitations, and may require additional forms and documentation to claim them.

How to file and pay taxes as a small business?

Small businesses have to file and pay taxes to the federal, state, and local tax authorities, according to the applicable tax laws and regulations. The filing and payment deadlines, methods, and forms vary by type of tax and jurisdiction. Here are some general guidelines for filing and paying taxes as a small business:

• Federal taxes: Small businesses have to file and pay federal taxes to the IRS, using the appropriate forms and schedules. The filing and payment deadlines depend on the type of tax and the tax year of the business, but they are usually on or around April 15, June 15, September 15, and January 15 of each year. Small businesses can file and pay federal taxes electronically, by mail, or in person, depending on the type and amount of tax.
• State and local taxes: Small businesses have to file and pay state and local taxes to the respective state and local tax agencies, using the required forms and procedures. The filing and payment deadlines, methods, and forms vary by state and locality, and by type of tax and business. Small businesses can check with their state and local tax authorities for the specific tax rules and regulations that apply to them.

What are the benefits and challenges of taxation for small businesses?

Taxation is a complex and dynamic issue for small businesses, as it affects their profitability, cash flow, and growth. Taxation can have both positive and negative impacts on small businesses, depending on the type, rate, and structure of the tax system. Some of the benefits and challenges of taxation for small businesses are:

• Benefits: Taxation can provide some benefits for small businesses, such as:
  • It can fund public services and infrastructure that support the business environment and the economy, such as education, health, security, transportation, etc.
  • It can create incentives and opportunities for small businesses to invest, innovate, and expand, through tax deductions, credits, exemptions, and preferential rates.
  • It can enhance the competitiveness and reputation of small businesses, as they comply with the tax laws and contribute to the social welfare and development.
• Challenges: Taxation can also pose some challenges for small businesses, such as:
  • It can increase the cost and complexity of doing business, as small businesses have to deal with multiple taxes, rates, rules, and regulations, at different levels of government.
  • It can reduce the profitability and cash flow of small businesses, as they have to pay taxes on their income, sales, property, payroll, etc., which may affect their ability to reinvest, save, or borrow.
  • It can expose small businesses to potential tax risks and liabilities, such as audits, penalties, and fines, if they fail to comply with the tax laws and obligations, or make errors or omissions in their tax filings or payments.

Conclusion

Taxation is an inevitable and important aspect of running a small business in the USA. Small businesses have to understand and comply with the various federal, state, and local taxes that apply to them, as well as the tax deductions and credits that they can claim. Small businesses also have to weigh the benefits and challenges of taxation, and seek professional advice if needed.

We hope you found this blog post helpful and informative. If you have any questions or comments, please feel free to contact us. Thank you for reading.