Being an owner of a small business has its own set of advantages, right? You are the boss, can set flexible working hours, can take decisions without any influence. It’s a one-man show. But there are few disadvantages of owning a business for yourself. Yah! That’s correct, determining the right taxes for your business and fulfill your tax liability.
Calculating taxes for small businesses is seriously stressful, but you need to figure it out at least once a quarter. Let’s learn more about calculating taxes for your first year of business.
Legal Structure of your Business
For estimating your tax liability, you need to determine the legal structure of your business. The Internal Revenue System (IRS) helps to categorize your business under the following business structures: partnership, a sole proprietorship firm, LLC, or C Corporation.
How to Calculate Taxes for Small Business?
It’s important to remember the calculated taxes during your filing. You need to take your yearly income, subtracted the credits and deductions to get your taxable income. Then you need to put that taxable income in certain tax brackets.
These tax brackets correspond to each rate of tax. At last, you need to multiply the rate of tax and your taxable income to get the sum you need to pay to the IRS
How to Calculate Employment Taxes?
Every small business needs to pay employment taxes and calculating employment taxes is never been so difficult. So, hiring people for your business comes with paying employment taxes from your business. However, you also need to break it down into Medicare and social security tax.
How to Calculate Social Security Tax?
The employees in your business need to pay social security taxes if their income is below $132,900. However, if your income is above $132,900, then you have to pay taxes amounting to that money.
To calculate the taxes, you have to take 12.4% of your employee’s income and pay 6.2% for taxes. Your employee also has to pay the other half of 6.2%.
How to Calculate Medicare?
Like social security taxes, everyone has to pay Medicare. However, for calculating this, just deduct 2.9% from your employee wages, and divide it into half. This comes down to 1.45%. Your employee should pay the other half of 1.45%.
How to Calculate the Estimated Taxes?
This is where things can get tricky with the tax liability. For personal filers who file their taxes once a year, small business owners need to file their taxes every quarter. This means you need to pay your taxes four times for a single year.
Estimated taxes or rather quarterly taxes are calculated on your taxable income for an entire year. It is tough to calculate especially if you own a small business.
You need to follow the below steps to determine your tax liability.
- Calculate your taxable income for this current year.
- You need to calculate your income and self-employment taxes.
- Divide your estimated taxes into quarterly payments.
- Send this quarterly tax payment to IRS.