Finding out how much federal tax you owe is really complicated, most small business owners actually ask CPAs to do it for them.
But even after hiring a CPA, it is still essential to know the mysterious art of calculating the own taxes. You should be able to plan ahead, save money on CPA billable hours and never enter the tax season cluelessly.
Quick Look At How To Calculate The Tax Liability
When finding out how much federal tax the small business owes, you must start by determining the entity type. If your business is a C corporation, you need to pay tax twice, at both the corporate and shareholder levels. The income tax rate would also be flat 21%.
Also, if the business is not a C corporation, the tax rate would depend on the taxable income and the filing status.
Know The Entity Type
There are several business entity types you need to know about. There are C corp, partnership, sole prop, etc. But for the purpose of finding out how much tax the small business actually owes, there’s only C corporations, and everything else.
If you are not sure what the entity type is, just ask the CPA. He would be able to guide you properly on this. Moreover, if you have a small business with no accountant and you haven’t thought about entity type, there are chances the government would classify you as a sole proprietor.
C corporations are the only business type that pays corporate income taxes. So, if your business is not a C corp, it known as a flow-through entity since profits and losses flow through your business to shareholders and owners, who pay the taxes at the individual rate.
How Can You Figure Out The Tax Rate If You Are A C Corp?
The Tax Cuts and Jobs Act really simplified tax services such as calculations for C corporations. It has replaced the graduated corporate tax rate schedule that includes eight various tax rate brackets with a flat 21% tax rate.
In simple words, if you are the owner of a C corporation, irrespective of the taxable income your business has, the income tax rate would be 21%.
Double Taxation For C Corporations
The way this tax system has been structured, the C corporations usually get taxed twice; at the shareholder level when profits get distributed to owners as dividends and at the corporate level.
One way for corporations to skip this double taxation is to incorporate as an S corporation instead of a C corporation. Now, S corporations are usually flow-through entities so income doesn’t get taxed at the corporate level.
But there are some drawbacks to choosing S corporation status that might outweigh the tax savings. It is better to consult with your CPA on this one.
How Can You Figure Out The Tax Rate If Not A C Corp?
If your business is not the C corporation type, it means this is a flow-through entity. Due to this, you would be paying taxes yourself, instead of the business paying them.
The tax rate would depend on the amount of the business’s taxable income as well as your tax filing status.
Making Estimated Tax Payments
Many business owners actually think that their income tax payment deadline is on Tax Day, which falls in mid-April. But federal income taxes need to be paid as incurred.
It means that most of the small businesses need to make payments throughout the year depending on the estimate of their total taxable income at the year-end.
Finding out how much your small business owed in taxes is actually the first step. Once you have got it all figured, you would need to pay the taxes. If you have any confusion or question, hiring a CPA would be the best option.
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