Small Business Taxes: 2019 Guide for Business Owners

Taxes can be very complicated, and many small business owners struggle to understand how their tax liability is determined. Business owners struggle to understand the corporate income tax rate, which deductions they are eligible for, and what terms like pass-through rate even mean. In addition to income taxes, business owners must also be aware of payroll taxes, unemployment taxes, and other kinds of taxes.

Although 2020 may not see major changes to small business tax code, there are some important changes to keep in mind. 2019 was the first year that tax reform- the Tax Cuts and Jobs Act- goes into effect. This has caused confusion among small business owners about how the new law will impact their tax bill and change their reporting responsibilities. In addition, last year, Congress introduced some major adjustments to business tax law, including lower corporate tax rate, new rules for pass-through businesses and a tax break for some industries. As these laws and regulations continue to be implemented, this year will be the year of adjusting to change as opposed to incorporating new ones. These adjustments mean your taxes could be different from last year, and if you are a small business operating domestically, you should experience mostly positive changes.

Small Business Tax Rate

The first thing that comes to mind when business owners think of business taxes is probably federal and state business income tax rate. However, according to the National Federation of Independent Business, most small businesses don’t pay income tax at a business rate. About 75% of small businesses are not corporations. This large percentage of small businesses are considered “pass-through” entities, which means they pay tax at the personal tax rate of the owner.

Since small business, or non-corporate, tax rates are tied to the total income of the business owner, we need to look at the income tax rates that went into effect as of 2018 and will continue for eight years. 

Corporate Tax Rate

The top corporate tax rate changed from 35% to a flat rate of 21% in 2018. The corporate tax rate also applies to LLC’s who have elected to be taxed as corporations. This change has no expiration date. On average, the effective small business rate is 19.8%. However, small businesses pay different amounts in taxes based on their entities. Sole proprietorships pay a 13.3% tax rate, small partnerships pay a 23.6% tax rate, and small S corporations face 26.9% tax rate.

State Taxes for Businesses

For states that have an income tax, the new tax law also affects state income taxes and other state taxes. Some states have a better business tax climate than others; the Tax Foundation rates states on their business tax situation, with all taxes taken into account. Some of the tax reform law changes will have a direct impact on your business, depending on the state in which you do business.

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Other Taxes a Business Might Pay

In addition to income taxes, the largest tax bill small businesses pay is for payroll taxes. Put simply, payroll taxes are taxes paid on the wages and salaries of employees at the rate of 7.65% on employees gross payroll. Other payroll taxes, like unemployment taxes and workers compensation taxes, increase the amount of tax an employer must pay. 

In addition to payroll taxes, some other taxes your business will be responsible to pay include:

According to Investopedia, Capital gains tax is a tax levied on capital gains, which are profits from the sale of specific types of assets, including stocks, bonds, precious metals, and real estate. This tax is calculated on the profit – or positive difference – between the sale price and the original purchase price of the asset.

Businesses must also pay property tax on real property owned by the business.

Your small business is also responsible for paying tax on dividends from business investments.

Limitless Investment and Capital Tax Preparation and Assistance Services for Small Businesses

While running a small business, every penny counts. Your small business may have the ability to minimize taxes which could be the difference between profitability and just scraping by. Don’t pay more taxes than you owe and hire an expert from Limitless Investment and Capital.

Deductions for pass-throughs and corporations

The largest change all businesses are facing this year is a significant education for both pass-through and corporate entities. Pass-through companies make up about 95% of U.S. businesses which are small businesses structured as S corporations, limited liability companies, sole proprietorships and partnerships. The new bill provides a 20% deduction for all of those businesses. However, there is a limitation on service-based businesses, such as accounting firms or law firms making more than $315,000 per year (157,000 if single).

As we discussed above, C corporations are also getting a big deduction. The new legislation lowers the tax rate from 35% to 21%. The lowered rate aims to bring major corporations back to the U.S. to employ workers and create wealth.

Important deadlines

In addition to some structural changes, there are some important deadlines to keep in mind as well:

• S corporations need to file their business taxes by March 15.

• The deadline for 2019 tax returns is April 15.

• Quarterly estimated tax deadlines are April 17, June 15, September 17 and January 15.

Outsourced Tax Preparation and Assistance Services

As the owner of a small business, do you find yourself worrying when it comes to filing tax returns? Do you find it burdensome to collect all your financial and business transaction records at the end of every quarter/year and send it a CPA to prepare your tax returns? Preparing your tax returns at the last minute is not only an expensive affair but can also cause other issues such as, recruiting seasonal accountants and then managing them for a short time period. Instead of such problems, your small business can outsource tax preparation and assistance services by sending over all your documents to a skilled tax financial service provider.