Business Taxation Meaning:

Everything You Need to Know

The meaning of business taxation refers to the taxes that businesses must pay as a normal
part of business operations. Whether you are a sole proprietor, partner, part of a limited
liability company, or a corporation, your business is responsible for adhering to tax
regulations. Each type of business will produce distinct tax consequences. Consider your
business' tax concerns along with its non-tax concerns, so that you'll know which type of
entity will help your business prosper and grow, or make it easier to pass on to heirs.

Types of Business Taxes

There are five major kinds of business taxes. They are:

 Gross-receipts tax.
 Corporate franchise tax.
 Employment withholding tax.
 Excise tax.
 Value-added tax (VAT).

In some industries, such as mining and insurance, companies will need to pay additional
taxes. While businesses pay income tax, property tax, and sales tax, these taxes are not
specific to business and are thus not generally considered business taxes. The reality of
economic impact is that all taxes are "people taxes," as they impact people on a personal
level.

Tax Liability
As a small business owner, you need to manage many different expenses, including your
business' taxes. Several aspects of your company will require taxation, as enforced by the
government. The amount of money you owe to federal, state, and local tax authorities is
your tax liability. Tax money will be used by the government to fund administration and
social programs.
As tax liability is a legally binding debt, you are required to pay the taxes you owe or you
may face government penalties. Tax liability is a short-term liability, which means that you
must pay it within a year. Short-term liabilities, such as tax liability, may be recorded
together in your accounting workbook or balance sheet.
Any transaction that has a tax consequence is called a "taxable event". The government
has the authority to determine which events are taxable. Any time a taxable event takes
place at your business, you'll need to pay the associated tax authority. Taxable income,
issuing payroll, and making sales are all taxable events. Different taxable events will require
different amounts of tax liability, which are calculated as a percentage of the total event.
Selling a product is a taxable event for which the government may charge you sales tax.
Instead of paying sales tax out of your own pocket, you can include the amount in the total
price that you charge a customer. After you collect sales tax, you'll need to report it and
send it to the appropriate government agencies. You can pay sales tax on a regular basis
(quarterly or monthly). Earning income is another taxable event. Federal and state income
tax liability is based on a percentage of your earned income.

Calculating Business Taxes

It's important to understand taxation processes and to know exactly when and how to
perform business and personal transactions, in order to reduce your tax obligations. As a
business owner and a taxpayer, there are typically multiple ways to complete a taxable
transaction, one of which will result in the lowest legal tax liability. Remember, it's smart to
avoid taxes, but it's illegal to evade them through concealment or deceit.
You may be able to deduct business expenses if you are engaged in a "trade or business,"
which means that you are conducting business activities for livelihood or profit. The IRS
defines a trade or business as one in which both a profit motive and economic activity are
present.
All of your taxable income will be calculated according to the tax year. All income received
or accrued during a single year is recorded on that year's tax return, along with expenses
paid or accrued. Once the tax year ends, any tax-saving strategies must have already been
applied.
You'll also need to report your accounting method to the IRS. The two basic methods most
applicable to small business owners are "cash" and "accrual." Under some circumstances,
you might be able to use a hybrid that combines components of both. In addition, certain
kinds of businesses may be allowed to use special accounting methods.
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Income Tax
All businesses except partnerships must file an annual income tax return. Partnerships
file an information return. The form you use depends on how your business is
organized. Refer to Business Structures to find out which returns you must file based on
the business entity established.
The federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or
receive income during the year. An employee usually has income tax withheld from his
or her pay. If you do not pay your tax through withholding, or do not pay enough tax that
way, you might have to pay estimated tax. If you are not required to make estimated tax
payments, you may pay any tax due when you file your return. For additional
information refer to Publication 583.
Estimated tax
Generally, you must pay taxes on income, including self-employment tax (discussed
next), by making regular payments of estimated tax during the year. For additional
information, refer to Estimated Taxes.

Self-Employment Tax
Self-employment tax (SE tax) is a social security and Medicare tax primarily for
individuals who work for themselves. Your payments of SE tax contribute to your
coverage under the social security system. Social security coverage provides you with
retirement benefits, disability benefits, survivor benefits, and hospital insurance
(Medicare) benefits.
Generally, you must pay SE tax and file Schedule SE (Form 1040) if either of the
following applies.

 If your net earnings from self-employment were $400 or more.

 If you work for a church or a qualified church-controlled organization (other than as a
minister or member of a religious order) that elected an exemption from social security
and Medicare taxes, you are subject to SE tax if you receive $108.28 or more in wages
from the church or organization.

Note: There are special rules and exceptions for aliens, fishing crew members, notary
public, state or local government employees, foreign government or international
organization employees, etc. For additional information, refer to Self-Employment Tax.

Employment Taxes
When you have employees, you as the employer have certain employment tax
responsibilities that you must pay and forms you must file. Employment taxes include
the following:

 Social security and Medicare taxes

 Federal income tax withholding
 Federal unemployment (FUTA) tax

For additional information, refer to Employment Taxes for Small Businesses.

Excise Tax
This section describes the excise taxes you may have to pay and the forms you have to
file if you do any of the following.

 Manufacture or sell certain products.

 Operate certain kinds of businesses.
 Use various kinds of equipment, facilities, or products.
 Receive payment for certain services.
Form 720 - The federal excise taxes reported on Form 720, consist of several broad
categories of taxes, including the following.

 Environmental taxes.
 Communications and air transportation taxes.
 Fuel taxes.
 Tax on the first retail sale of heavy trucks, trailers, and tractors.
 Manufacturers taxes on the sale or use of a variety of different articles

Form 2290 - There is a federal excise tax on certain trucks, truck tractors, and buses
used on public highways. The tax applies to vehicles having a taxable gross weight of
55,000 pounds or more. Report the tax on Form 2290. For additional information, see
the instructions for Form 2290 .
Form 730 - If you are in the business of accepting wagers or conducting a wagering
pool or lottery, you may be liable for the federal excise tax on wagering. Use Form 730,
to figure the tax on the wagers you receive.
Form 11-C - Use Form 11-C, Occupational Tax and Registration Return for Wagering,
to register for any wagering activity and to pay the federal occupational tax on wagering.
Excise tax has several general excise tax programs. One of the major components of
the excise program is motor fuel. For additional information, refer to Excise Taxes.