Just as individuals have federal taxes to pay each year, so do businesses. The type of filing and amount of tax owed depends on what kind of business you have, what industry you're in, and other factors. Sole proprietorships, limited liability companies (LLCs), corporations, and other business entities all face penalties from the Internal Revenue Service (IRS) if they don't file a return or violate tax law. Penalties for business taxes are usually harsher than penalties for individual taxpayers.
Starting and running your own business can be exciting but stressful. If you need help sorting out your California company's tax situation, an experienced tax attorney can help.
Which Federal Taxes Do Businesses Pay?
Whether you have employees or work for yourself, you're responsible for paying certain business taxes. Some types of businesses, like partnerships, may not have to pay taxes on the entity level, but they still must file a return.
Examples of IRS business taxes:
- Income tax
- Estimated tax
- Self-employment tax
- Employment taxes
- Excise tax
If you're running a business or earning self-employment income, you must make estimated payments or withholding deposits throughout the year.
Small Business and Self-Employed Taxes
Small businesses and self-employed persons often run into issues when dealing with the IRS. Most of these problems arise from keeping personal and business accounts separate.
Common IRS issues for SMBs and independent workers:
- Correct employee or independent contractor classification
- Proper payroll tax withholdings and deposits
- IRS audits for self-employed individuals
- Hobby-loss rule
- Home office deduction
Self-Employment tax
Self-employed individuals must withhold their own federal taxes from their income, as they don't have employers who do it for them. If you make more than $400 during one year as a freelancer, you must pay the self-employment tax.
The self-employment tax is 15.3% and generally applies to your net earnings. This tax covers your contributions to social security and Medicare. Depending on your situation, you may be able to deduct half of your self-employment taxes as an adjustment to gross income.
Penalties for Business Taxes
When businesses don't file returns properly or underpay their taxes, either intentionally or unintentionally, the IRS imposes monetary penalties.
Examples of penalties for IRS business taxes:
- Tax fraud penalties
- Audit penalties
- Failure to file penalty
- Underpayment tax penalties
- Trust Fund Recovery Penalty
The IRS will charge interest in addition to these penalties, substantially increasing your total tax debt.
California Business Taxes
The state of California imposes three types of business taxes:
- Corporate tax: Corporations pay a flat rate of 8.84% on all net taxable income in California.
- Franchise tax: The franchise tax applies to S-corps, LLCs, LPs, and LLPs.
- Alternative minimum tax: A flat rate of 6.65% applies to corporations to prevent them from writing off too much income and minimizing corporate tax.
A California Business Tax Lawyer
Do you have questions about your federal and California business taxes? Contact a California Tax Attorney today to set up a consultation with an experienced business tax lawyer.