What Is Federal Business Tax?
If you want to run a business, you need to know more about taxes.
More specifically, you need to understand how taxes affect your business.
Today, we will dive into the world of federal business taxes, how they work, and what considerations may affect your business’ day-to-day operations.
How Federal Business Tax Works
As a business owner, knowing your tax implication is essential.
Particularly in the United States, where you are going to need to pay three types of taxes:
We’ll focus mainly on federal taxes, those levied by the federal government, during our discussion today. That said, all three are important.
Federal income tax is what is typically known as a “pay-as-you-go” tax. This means that you have to pay the tax as you earn or receive income throughout the year.
Beyond and including income tax, here are some additional considerations to note:
- Employer Identification Number (EIN) – Most businesses will require an EIN – this is your federal tax ID number. After you register your business you will receive one.
- Income Tax – Businesses file income tax to report income, gains, losses, and other important information.
- Recent Legislation – The Tax Cuts and Jobs Act (TCJA) recently reduce the U.S. federal business tax rate from 35 percent to 21 percent.
So, on a baseline level, the federal business tax in the United States is 21 percent. That said, 44 of the 50 states levy corporate income taxes, and these can range between 3 percent (in places like North Carolina) to 12 percent (in places like Iowa).
The average corporate tax is somewhere in the neighborhood of 6 percent. This is important to remember, because while federal taxes do not change, where you operate your business can have a drastic effect on your tax bill at the end of the year.
Paying Federal Business Tax
When the times comes for you to file your federal income taxes, there are many ways to ensure that you are doing things the right way.
Depending on your type of business, you may require a different tax form to report your business income and expenses. Typically, though, this is taxed in similar ways.
Overall, though, here are some standard tips to help make the process easier:
1. Collect Your Records
The first step in managing federal business tax is to gather all of your records.
Before filling out any and all forms, you need to have your records in front of you – that includes your earnings, expenses, and everything in between.
That is why it is so important to rely on software to help organize your finances so that you can have the full picture you need when you need it. Rather than simply trying to remember, you can have a full record of everything you need.
2. Find the Right Forms
Federal business taxes are complicated, and determining which form you need is essential.
You always need to report your earnings to the IRS and to pay tax on them, in order for your business to continue running.
Depending on how you operate your business, though, this may change. Whether you run a small business, an LLC, or you are the sole owner, you need to keep in mind the various forms that are required of you to fill out.
3. Fill Out the Forms
After finding the right forms, it’s only natural to fill them out!
This is what is known as “Schedule C” or “Form 1120.” This is the form where you report your business’ earnings and all of your other relevant financial information.
Schedule C is only a mere two pages long, and it lists all of the expenses that a business can potentially claim. Once you finish it, you merely subtract your expenses from your earnings to reach your net profit or loss.
On the other hand, Form 1120 requires a bit more detail (which may not always apply to small businesses). It also separates your business income tax return from your personal income tax return – another key distinction for small business owners or entrepreneurs.
4. Never Forget Deadlines
When it comes to federal business tax, it’s all about deadlines.
If you are using the aforementioned Schedule C document, it becomes part of your personal income return and will require no separate filings (with the same deadline, April 15th).
Things change if you are going to be taxed as a C-Corp, though, when you need to fill out Form 1120. This form will need to be filed by the 15th day of the fourth month, following the close of the tax year (for most this is also April 15th).
If you are being taxed as an S-Corp, then there’s another form – Form 1120S. This must be filed on the 15th day of the third month following the year. That would be March 15th.
Manage Federal Business Taxes With Board
Paying your federal business tax is an essential step to the health of your business – not only because it’s the law, but because it allows you to evaluate how much your business is making, losing, and how you’re managing money overall.
Using Board, you can gain greater insight into your finances, where they are going, and how they are going to look in the future. This way, you can get a better look into your tax implications in the years ahead.
Interested in learning more? Discover how Board can change the way you view your finances by clicking here or start your free trial today.