As a business, it's important that you understand the way your company will be taxed on its revenue and what role dividends can play. This not only allows you to ensure you are compliant with all relevant regulations, but also helps you to identify any areas where you may be over or underpaying your contributions.
However, this simple guide should help you to understand what your legal obligations are.
If your outgoings and income are fairly simple, you may be able to do your tax return yourself, but many small businesses turn to some form of tax preparer to help them understand their obligations.
One of the biggest factors affecting your tax, aside from your income and expenses, is what the IRS classes your business as. There are three main types of small business in the US, though there are some discrepancies among individual States:
- Sole proprietorship - This is the default type of business for companies that haven't made a filing to any State to be considered another type of organization. Someone operating as a sole proprietorship will pay income taxes through the owner's personal tax return. The Schedule C (Profit or Loss for a Small Business) is used to calculate the business profit, which is included with other income on the individual's Form 1040.
- Partnership - This is where there is more than one partner in your firm and changes how you file taxes. You must file a return for your business on Form 1065 and each partner must also fill out a Schedule K-1 showing their share of the partnership's profits or losses.
- Limited liability company (LLC) - This doesn't affect your federal income tax but a single-member (one person) LLC will pay taxes as a Sole Proprietorship. If there are multiple members, it will pay incomes taxes as a Partnership.
Federal Income Tax
Regulated by the government, this is payable by all corporations and self-employed people operating in the US. Companies must complete a form when filing a tax return, which will work out what your taxable income is and whether there are any exemptions. What specific form you need will depend on the size of your business and whether you are registered self-employed, a partnership or a company.
The amount you are taxed will depend on the total of your gross receipts minus any business expenses, such as wages. This taxable income will be subject to tax contributions of between 15% and 35% depending on how much you earn. You may be able to get your federal income tax reduced by applying for credits for research or similar activities.
Depending on the nature of your organization, you may be eligible for more tax credits and it's important to understand that the amount you pay each year may vary even if your income stays the same depending on what rates are set by the IRS.
The due date of your filing and payments will depend on your tax year. Most companies in the US use the calendar tax year, which runs from January 1 to December 31. This means you must file your corporate tax return by April 15 but State taxes can vary. You can also adopt a new or different tax year but you must inform the IRS before changing your accounts. It's also worth noting that these deadlines can change, depending on how the IRS classifies your business.
State Income Tax
Each State in the US also has their own individual tax system, which businesses must pay. This is often based on your Federal Income amount but filings are separate to the returns made to the IRS. State income tax is paid to local authorities in each State and the amount can vary considerably between areas.
If your company operates in more than one State, you may be subject to multiple taxes. Generally, a State can impose taxes on any enterprise that has a taxable connection with it. Most States have their own definition of what a 'nexus' or taxable connection is but broadly speaking; owning or renting property or storing goods would be considered enough to subject you to that State's taxes.
If your company sells to other countries then you may also have to pay taxes on goods, services or loans under transfer pricing regulations. You may also be subject to sales and use taxes, depending on the nature of your business and volume of sales.
Payroll tax obligation exists for any US company with employees, and defines how much tax comes out of wages. This includes ensuring enterprises are making contributions to their staff's social security and medical insurance and other commitments where applicable.
America also requires US-based multinationals to pay taxes on any profits made abroad, though there are exemptions and different interpretations of what companies are eligible for these taxes. These foreign taxes aren't taken straight away from profit, which can further complicate the already grey area.
Dividends are any payments that companies receive from their investments, such as corporate stocks and shares in a mutual fund. Ordinary dividends can be split into either qualified and nonqualified dividends, which will affect the level they are taxed at.
Most dividends paid on corporate stocks are qualified dividends and, as such, qualify for lower tax rates. To treat your investments as qualified dividends, the IRS will need to know that you've had it for more than 60 days during the 121 day period that begins 60 days prior to the ex-dividend date. Nonqualified dividends are subject to regular income tax rates.
If you receive dividends, you'll need to file Form 1099-DIV to the IRS to report the value, as well as any capital gain distributions, non-dividend distributions and if any tax has been withheld from your payments.
There are a few ways that businesses can reduce the tax they have to pay, though it's important to contact the IRS to find out whether you will be eligible.
A tax break that allows businesses to deduct 50 per cent of costs for new equipment when it's purchased. This will stay in place until 2019 but the amount companies can claim against new purchases are expected to decrease each year under the PATH Act.
Work Opportunity Tax Credit
The Work Opportunity Tax Credit gives companies an incentive to hire certain long-term unemployed individuals, such as veterans. This has also been secured until 2019 and allows employers to claim back tax on wages for new hires that have been out of work for at least 27 weeks.
There are other tax breaks that businesses may qualify for including the Earned Income Tax Credit, ones relating to pension schemes and education.