Understanding Small Business Income Tax

Katie Fleming

Katie Fleming

Co-founder and COO of Owner Actions

A person stands ready to review his small business income tax requirements

When you chose a legal structure for your business, your selected impacted the taxes you’ll pay for your business’s activities. Because of that choice, you may be responsible for income tax payments at the federal level, and in many instances, the state and local levels, too.

In this article, you’ll find a brief overview of the income taxes your business may be subject to and resources that will help you meet your tax obligations.

But first…

Please note that this article does not constitute legal advice, and it should not be considered a substitute for counsel from a legal professional. Contact your attorney for advice specific to your business.

 

What is income tax?

Individuals and businesses are required to report the income they earn each year to the federal government, and in some cases, their state and local governments. Current tax laws direct people and businesses to return a portion of their income to the government to cover its costs of operation.

 

Is my business required to pay income tax?

Most businesses must file and pay income taxes at the federal level. However, partnerships file an annual information return, which allows their partners to report their shares of the entity’s profits or losses on their individual tax returns.

Your state may also require you to pay a corporate income tax; most do. To find out if income tax is a requirement in your state (or another state in which you conduct business), contact your state’s taxation authority:

Alabama

(334) 242-9600

Hawaii

(800) 222-3229

Massachusetts

(617) 887-6367

New Mexico

(505) 827-0700

South Dakota

(605) 773-3311

Alaska

(907) 465-2500

Idaho

(800) 377-3529

Michigan

(517) 636-6925

New York

(518) 485-2639

Tennessee

(615) 253-0600

Arizona

(602) 255-3381

Illinois

(217) 785-3707

Minnesota

(800) 657-3605

North Carolina

(877) 252-3052

Texas

(800) 252-5555

Arkansas

(501) 682-4775

Indiana

(317) 232-2240

Mississippi

(601) 359-1633

North Dakota

(701) 328-1241

Utah

(800) 662-4335

California

(916) 845-4669

Iowa

(800) 367-3388

Missouri

(573) 751-2836

Ohio

(855) 995-4422

Vermont

(802) 828-2865

Colorado

(303) 238-7378

Kansas

(785) 368-8222

Montana

(406) 444-6900

Oklahoma

(405) 521-3160

Virginia

(804) 367-8037

Connecticut

(860) 509-6000

Kentucky

(502) 564-2694

Nebraska

(402) 471-4079

Oregon

(844) 469-5512

Washington

(360) 705-6705

Delaware

(302) 739-3073

Louisiana

(855) 307-3893

Nevada

(775) 684-5708

Pennsylvania

(833) 722-6778

West Virginia

(866) 767-8683

Florida

(850) 488-6800

Maine

(207) 624-9670

New Hampshire

(603) 230-5000

Rhode Island

(401) 574-8484

Wisconsin

(608) 266-2776

Georgia

(877) 423-6711

Maryland

(410) 260-7314

New Jersey

(609) 292-6400

South Carolina

(844) 898-8542

Wyoming

(307) 777-5200

.

Then, contact your municipality’s taxation office to learn about any local income tax requirements your business may need to fulfill.

 

How do I report my business's income?

Most businesses are required to obtain an employer identification number (EIN)—commonly known as a tax ID number—to report their taxable income. This number is generally required of businesses that meet any of the following criteria:

  •  It's organized as a corporation or partnership.
  • It employs workers.
  • It's withholding taxes on income, other than wages, that will be paid to a non-resident alien.
  • It offers a Keogh plan.
  • It's a plan administrator, farmers’ cooperative, non-profit, real estate mortgage conduit, estate, or non-exempt trust.
  • It files excise, employment, or alcohol, tobacco, and firearms tax returns.
  • It was obtained through a purchase or an inheritance.

 

.

The IRS assigns EINs to businesses to connect them with their tax obligations. As a small business owner, you will use the unique number you’re assigned on every federal and state tax document you submit, but you’ll also use it to hire employees, open bank accounts, and apply for business licenses and permits.

An owner, a partner, or a principal officer who can serve as a responsible party for the business can attain a tax ID number in one of the following four ways:

1.Online: Visit irs.gov and complete the online application. This option is available to any entity whose principal business, office, or agency is located in the United States or one of its territories.
2.Fax: Compete IRS Form SS-4 and remit it to the fax number that’s provided here.
3.Mail: Download Form SS-4 and mail it to the address that’s provided here.
4.Phone: Call (800) 829-4933 Monday through Friday between the hours of 7 a.m. and 10 p.m. Eastern Time and work through the process with a representative. International applicants should call (267) 941-1099 Monday through Friday between the hours of 6 a.m. and 11 p.m. Eastern Time.

 

Your state may issue a separate state ID number. Be sure to contact your state’s tax authority through the links above to learn about the requirements you must meet.

At tax time, you will complete tax forms that will help you report your business’s income for the tax year, less any deductions it's eligible to use.

 

Which forms should I file?

Your business's legal structure determines which forms you may be responsible for completing:

Sole proprietors

For 1040 or 1040-SR; Schedule C
(or Schedule F for farm businesses)

Partnerships

Form 1065

Individual partners in a partnership

Form 1040 or 1040-SR; Schedule E

C-corporation

Form 1120

S-corporation

Form 1120-S

S-corporation shareholder

Form 1040 or 1040-SR; Schedule E

Limited liability corporations

Submit the forms required for how you elected to have your businesses treated for tax purposes

.

Note: Alternate or additional schedules may be required based on the unique circumstances of your business.

 

Where can I go for help?

There are several resources that can help you with your income tax questions:

 The IRS. You can call the IRS’s business line at (800) 829-4933 or use its Interactive Tax Assistant, which can answer specific tax law questions about filing and deductions.

Your state’s tax authority. For state-specific questions, use the links provided above to connect with your state’s tax office.

Your local tax authority. You can connect with your local tax office or visit your city’s tax website to learn about your tax obligations.

An accountant. You could also connect with an accountant (or a service like TaxHive) who could review the details of your business and provide you with a detailed list of every tax obligation you’re required to fulfill.

Would you like to connect with an accountant? Check out some of our favorite firms:

 

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What's next?

Income tax isn’t the only tax your business may need to cover. Depending on your legal structure, you may need to pay self-employment tax, estimated tax, employment tax, and excise tax at the federal level and sales tax at the state level. Speak with your accountant to determine your tax obligations.

Log into your owner’s portal for more articles and advice that can help you navigate the tax, financial, legal, and operational aspects of running your business.

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