Business Finance 101: Your Complete Guide to Different Types of Taxes in the US

types of taxes in the US

As there are many types of taxes in the US, you might know which taxes you have to pay personally, but things are much more complicated when you file your business taxes. 

If paying taxes has the potential to cause you a lot of headaches, you may want to change your approach. That could mean enhancing your knowledge about taxes, starting filing your taxes earlier, using professional tax solutions, or consulting with a financial advisor. 

In this article, we’ll cover the most common types of taxes in the US and the specific taxes in each category. Let’s find out! 

The most important types of taxes in the US for businesses

Different companies pay different types of taxes because it depends on their products and services. However, most types of taxes in the US fall into three main categories: what you earn, what you buy, and what you own. 

Taxes on what you earn

  • Income tax (individual income taxes, corporate income taxes)

Income tax is a direct tax that a business pays based on its income or profit during the year. Though every state of the US imposes a business (also called corporate) income tax, the tax rates differ from state to state.

Partnerships don’t have to pay income taxes. However, they must file an annual information return to report income, gains, losses, and other important tax information.

  • Employment tax

Employment taxes are levied on employees’ wages and salaries to fund social insurance programs. In the US, the largest employment taxes are a 12.4 percent tax to fund social security and a 2.9 percent tax to fund Medicare, for a combined rate of 15.3 percent. Half of the employment taxes (7.65 percent) are remitted directly by employers, with the other half withheld from employees’ paychecks. Employment tax also covers employees’ federal income tax withholding and federal unemployment (FUTA) tax.

  • Self-employment tax

Self-employment (SE) tax is a social security and Medicare tax primarily for individuals who work for themselves. Your SE tax contributions ensure your coverage under the social security system. This package includes retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.

In general, you must pay SE tax and file Schedule SE (Form 1040 or Form 1040-SR) if either of the following situations applies.

  • You made $400 or more in net self-employment earnings.
  • You work for a church or a qualified church-controlled organization that elected an exemption from social security and Medicare taxes, and you receive $108.28 or more in wages from the church or organization.
  • Estimated tax

Estimated tax is a quarterly payment of taxes for the year based on the filer’s reported income for the period. This type of tax usually applies to small business owners, freelancers, independent contractors, sole proprietors, partners, and S corporation shareholders, those who do not have taxes automatically withheld from their paychecks as regular employees do.

You can calculate your estimated tax based on Form 1040-ES’s worksheet. You’ll need to estimate how much money you plan to make this year. If you overestimated your earnings, you can recalculate your estimated tax for the next quarter using a new Form 1040-ES. You need to estimate your income as accurately as possible to avoid penalties. 

Taxes on what you buy 

  • Sales and use tax

Some states charge sales tax on goods and services. However, there are some exceptions, such as if your business sells clothing, medicine, food, etc. Sales tax is a consumable tax that applies to retail sales, leases, and rentals of certain tangible personal property and services. Use tax applies when you buy tangible personal property and services from other states.

  • Gross receipts tax

Gross receipts taxes (GRTs) might look like sales taxes, but they actually tax the sellers rather than the retail buyers. This tax is a state tax applied to a business’ gross receipts (sales) regardless of profitability and without deductions for business expenses. Gross receipts tax is sometimes imposed instead of a corporate income tax or a sales tax.

Because gross receipts taxes are imposed at each stage in the production chain, they result in “tax pyramiding,” The tax burden multiplies throughout the production chain and is eventually passed on to consumers.

Gross receipts taxes are particularly destructive to startups and businesses with long production chains, which often lose money in their early years. Despite being dismissed for decades as a wasteful and unsound tax policy, politicians have recently reintroduced GRTs as a source of additional revenue. 

  • Excise tax

An excise tax, (or a sin tax), applies to goods and services that are regarded as harmful to people or the environment, like tobacco, alcohol, and fuel. If you’re doing business in this field, you have to collect and pay excise tax to the relevant federal and state authorities. The Internal Revenue Service (IRS) and the Alcohol and Tobacco Tax and Trade Bureau (ATFTB) are the two federal agencies that control excise taxes (TTB).

Taxes on what you own

  • Property tax

This type of tax, which is generally levied on immovable properties such as land and buildings, is an important source of revenue for state and municipal governments across the United States. Property tax supports local governments in funding public services (e.g., schools, roads, police and fire departments, and emergency medical services.)

However, the property tax is different in each state. Some states collect property tax from businesses in commercial real estate locations, while others collect “tangible personal property tax,” such as vehicles and equipment owned by businesses.

Overall, taxes on real property are relatively stable, neutral, and transparent, whereas taxes on tangible personal property are more problematic.

  • Franchise tax

A franchise tax is a government levy (tax) that some US states apply to certain business organizations such as corporations and partnerships that do business in another state. A franchise tax doesn’t depend on income but the tax rules within each state, with some calculating the company’s assets, net worth, or capital stock. 

What happens if you don’t pay your business taxes on time

Taxes are a serious matter that every business owner needs to pay close attention to. You must file tax returns on the IRS’s Form 1120, even if you believe that there are no owed taxes. Otherwise, you could be subject to late-filing and late-payment penalties and even have to pay interest. In this case, you could encounter a minimum penalty ranging from $135 to $205 or the amount of tax owed, whichever is smaller.

You may also be unable to claim the company’s net operating loss on your tax return since it must be recorded on Form 1120, which it will not be if you do not file taxes.

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