Hands down, running a business is no small feat. You have to deal with tax returns, regulations, accounting, cash flow, profit, loss and all other important facets.
If handled inefficiently, these issues could trigger penalties, losses and even the eventual closure of businesses. But let’s narrow it down to one specific facet: taxes.
Did you know that understanding your tax obligations can be the difference between your business’s growth and stagnation? Apparently, it is, and that’s where trusted IRS tax resources come in.
These tools are essential, especially when filing books and ensuring that an organization complies with the set tax laws. But first things first, what taxes should small businesses expect?
Who even enforces these taxes? How can the very taxes influence business decisions? Well, you’d better grab some coffee, as this is going to be a deep dive. The article will answer these and many more questions about taxes.
What Taxes Should Small Businesses Expect?
Ideally, tax obligations will vary depending on three things: the structure, size and location of your business. But, if your business is located in the U.S, there are a few common tax obligations that you’ll incur:
- Self-Employment Tax: This one covers your Social Security and Medicare in case you are a freelancer of sole proprietor.
- Payroll Taxes: Every business with employees is obligated to pay payroll taxes.
- Estimated Taxes: These are small tax payments made within the year to avoid a large sum at the end of the year.
- Local and State Taxes: These taxes can be in the form of sales tax, franchise tax, or state income tax. What matter is the location of the business.
- Federal Income Tax: You pay tax on your earnings. The amount depends on your level of profit and the number of deductions.
So many people and businesses file taxes annually, it is essential to understand the structure of these taxes for proper financial planning. Interestingly, over 213.4 million returns were filed in 2022 alone.
Who Enforces These Taxes?
The Internal Revenue Service (IRS) is the primary tax enforcer at the federal level. Interestingly, your business is mandated to prepare the income tax, self-employment tax and employment tax returns.
Local and state revenue departments also exist to enforce taxes at the state level.
As reported by TechRepublic, recent IRS budget cuts and layoffs have led to slower response times and limited access to live assistance. This has made self-guided tools and third-party platforms even more vital.
Did you know that noncompliance with tax laws can lead to an audit or charges being levied on your business? Even worse, it could ruin a business’s image and reliability in the eyes of banks and investors.
How Taxes Influence Business Decisions
So, how do taxes influence business decisions? Let’s find out:
- Spending: Business owners can cut various costs to minimize the taxes paid to the government.
- Hiring: Most small business owners often feel that complying with payroll taxes can hamper the growth and expansion of their workforce.
- Expansion: State taxes also control where and when companies decide to grow and develop.
- Investment: Business owners will likely delay investments if they expect large tax bills ahead.
A study from City A.M. found that nearly half of small business owners consider taxes a top factor when deciding to expand or reinvest. That’s why most business owners employ tax software, an accountant, or cloud-based solutions.
They simplify information reporting and facilitate prospective assessment of potential tax responsibilities.
Wrapping it up
When you think about it, taxes aren’t just a once-a-year concern; they are part and parcel of running a successful business. Small business owners are, in fact, faced with several tax obligations, whether payroll taxes or federal income taxes, to name but a few.
These taxes affect how business owners hire, fire, spend and grow, whether they like it or not. Thankfully, using IRS tax materials and strategic personal finance tools can help small business owners master a secure financial future.
Remember, the flux in tax legislation affects companies; hence, the more a business tries to understand the tax environment, the better it will prepare itself.
