This week, we’ll turn our attention to the what may be the most painful yet inevitable part of finance & accounting…
Taxes.
Taxes are one of those things that you’ll experience regardless of where you are based out of, and regardless of whether you are profitable…
and unfortunately, the government usually doesn’t make it too simple to understand just how much you need to remit in taxes.
This can leave you vulnerable to potential penalties and interest if not filed correctly.
Today's edition is going to cover all the business taxes you should expect with your company so that you can avoid any surprises when the government comes knocking on your door.
While the exact tax and due date of each tax filing may depend on the country you are in, most of these taxes are applicable to all countries.
What we’re going to talk about
Corporate Income Tax
Sales & VAT Tax
Delaware Franchise Tax
Payroll Tax
Other Lesser Common Business Taxes
The most common tax you’ll be paying is at the end of each year on all of your income.
Depending on your business structure, your business may also get taxed on the profits (this is the case for C corporations).
The due date for filing your taxes in the U.S. are as follows:
Partnerships, or entities taxed as partnerships (such as S corporations or LLCs) - March 15th
Corporations, and individuals - April 15th
It’s also common to file an extension, which will give you an extra 6 months to file your taxes.
Note however that the 6 month extension is just to file your taxes and not to pay your taxes. If you underpay your taxes by this due date, you will incur interest and potentially penalties for failure to pay on time.
If you get paid as a W2, then most of your taxes will most likely already be withheld from your paycheck. Any additional income that you collect from outside sources that do not include with holdings will need to be included in your tax return.
In addition to Federal income tax, you may also have to pay taxes on your income to the state and or city that you live in. Each state and city has their own rule.
Sometimes when you sell something, the government is going to want to take a piece of the action. In the U.S., we call that sales tax.
In the U.S., prices are often times quoted before sales tax, and then sales tax is tacked on to the final price.
As a consumer, you’ll pay that tax, and as a business owner, your job will then be to remit that tax to the government.
This can apply for products, and is especially common for companies selling Software as a Service.
A similar tax that is common outside of the U.S. is call Value Added Tax (VAT), or Goods and Services Tax (GST).
These taxes are consumption taxes levied on each stage of the production and distribution of goods and services.
Franchise taxes are taxes levied on certain types of businesses for the privilege of operating within a specific jurisdiction.
The most common franchise tax is the Delaware Franchise Tax, as Delaware is a common state for C corporations to incorporate.
This filing is due on March 1st, and involves you filing an annual report directly on the State of Delawares website based off of the Authorized Shares Method, or the Par Value Capital method.
The government has a preferred way in which they want you to pay your employee, which includes withholding taxes from their paycheck as mentioned above.
But in addition to withholding taxes for your employees, you’ll also need to pay taxes to the government each time you process a paycheck.
Technically, these are not “taxes”, but are rather contributions to specific funds, such as:
Social Security and Medicate Contributions (FICA) - These contributions under the Social Security and Medicare programs provide retirement, disability, and healthcare benefits to eligible individuals
Federal Unemployment Tax Act (FUTA) - These funds are used to provide temporary relief at the federal level to those who become unemployed.
Unemployment Insurance Taxes (UI) - These funds are similar to FUTA, but at the state level
Workers Compensation Insurance - this one isn’t quite a tax, but is a required insurance for employers to hold on behalf of their employees to provide benefits to employed who get injured or sick from their job.
It’s common for these taxes to account for 15-20% of the gross pay in a pay check for an employee
There are a number of other taxes that you may come across in your business, such as:
Property Tax - taxes levied on real estate (land and buildings) owned by the business
Excise Taxes - these are taxes applied to specific goods, services, and activities. Common ones are gas, tobacco, and liquor.
Alternative Minimum Tax - this is a minimum tax levied on both individuals and corporations
Environmental Taxes - these are taxes levied on activities that have a negative impact on the government
Although these are just 4 examples of taxes you may also come across in your business, the real list of additional taxes is endless
Before you can file your taxes, you need to be aware of what taxes to look out for.
The tax you owe to the government is dependent on a number of factors, including your geographic location, your industry, your business model, and several other factors.
Creating a tax calendar is a great way to manage & track what you owe, and when, so that you aren’t hit with a penalty.
Which tax is your least favorite?
if you’d like, you can say all of the above 😇
Thanks for reading, and we’ll see you next week where we’ll cover our last important function in your Finance & Accounting department, and that’s your Financial Planning & Analysis (FP&A) function, which relates to forecasting and budgeting.
Till then!
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