Cost To Do Business Taxes: Everything You Need To Know
The cost to do business taxes varies depending on the size and type of business entity.3 min read
2. Effective and Marginal Tax Rates
3. The Cost of Tax Preparation
4. Professional Tax Preparation
The cost to do business taxes varies depending on the size and type of business entity. A business is required to pay property taxes on any real estate it owns. It also pays taxes on dividends received through business investments.
Sole proprietorships, partnerships, and LLCs do not pay business taxes. Instead, the taxes are passed on to the business owners and reflected in their individual tax returns. As such, small business owners pay taxes on personal, business, and other forms of income.
Corporations are the only type of business structure that pays taxes. Although the owner(s) of corporations do not pay taxes on the corporation's profits, they are taxed on dividend income. This gives rise to the issue of double taxation as owners also pay income taxes on their salaries if they are employees of the corporation.
The Tax Cuts and Jobs Act
Signed into existence on December 2017, the Tax Cuts and Jobs Act made some key changes to the amount of taxes businesses pay and how they pay them.
Under the new tax law, large businesses and other organizations taxed as corporations experience the biggest tax cut — reduced from 37 percent, the highest possible tax rate, to a flat rate of 21 percent.
At 7.25 percent rate of employee gross pay, payroll taxes make up small business's most significant tax cost. Workers compensation and unemployment taxes increase the amount of business tax owners must pay.
Other taxes include capital gains tax — the taxes that are due from the sale of business assets and business investments. Short-term capital gains are taxed as ordinary income while long-term capital gains (held for over a year) are taxed at various levels.
Generally, small businesses will pay an estimated average tax rate of 19.8 percent.
Effective and Marginal Tax Rates
Also called the effective tax rate, the average tax rate payable by individuals and businesses is calculated by dividing total tax payable by taxable income. The marginal tax rate is another way to view tax rates and refers to the highest rate payable by individuals or businesses.
The tax rate varies depending on the type of business entity:
- S corporations face a 26.9 percent rate.
- Partnerships face a 23.6 percent rate.
- Sole proprietorships face a 13.3 percent rate.
- C corporations face a 17.5 percent rate.
The higher tax rate for corporations is due to their higher income. Research shows that over 18 percent of small S corporations have net incomes of at least $100,000 while the net income of 60 percent of small sole proprietorships stands at less than $10,000. Only 3.1 percent of sole proprietorships have net incomes approaching or equivalent to $100,000.
The IRS does not consider LLCs to be taxable entities. LLCs owned by a single individual are taxed as sole proprietorships. The tax liability of an LLC is added to Schedule C on the owner's personal tax return. On the other hand, a multiple-member LLC is taxed as a partnership. In either case, LLCs are taxed through their owners.
The Cost of Tax Preparation
No matter the size of your company, you must file taxes. However, small business owners are often caught unawares by the cost of tax preparation. The cost of preparing your taxes depends on the kind, size, and complexity of business operations. It also depends on whether the preparation is done for quarterly or year-end business taxes.
The fees for preparing annual, quarterly, and monthly tax forms may be included as part of your payroll service. Although you can outsource all the tasks relating to tax preparation, you can reduce costs by handling some of the administrative tasks either by hiring an accountant or using accounting software.
Professional Tax Preparation
Accounting software helps record all business transactions. Cash-based accounting software solutions can automatically compute totals, providing you with the figures needed to file taxes. You could also hire an accountant to handle your accounting and tax preparation needs.
For business income tax preparation, an accountant's service fees range from $175 to over $800. Although paying for tax preparation may not seem appealing, professional tax preparers often catch deductions and credits that you missed, saving you money in the long run.
If you need help understanding the costs of doing business taxes, you can post your legal need on the UpCounsel marketplace. UpCounsel accepts only the top 5 percent of lawyers on its site. Lawyers on UpCounsel come from prestigious law schools like Yale Law and Harvard Law and usually have 14 years of legal experience, including work on behalf of or with companies like Airbnb, Menlo Ventures, and Google.