Taxes are everyone’s least favorite thing – whether you’re a worker or an entrepreneur, you still have to pay them, and there is a whole variety of them you have to keep in mind.
While employees usually don’t have to worry about much else besides income tax and insurance when it comes to their salary, entrepreneurs have a whole range of taxes their companies might be forced to pay. Business taxes are complex and dependant on a whole range of factors.
Startups looking for success in the United States often struggle with grasping the country’s complicated taxation system – here’s what you need to know about taxes before you establish your business!
The Most Important of Business Taxes: Corporate Income Tax
Depending on the type of industry and business you’re running, what taxes you pay and their exact cost will differ. The corporate income tax, or CIT for short, is one of those taxes you’ll probably be always paying, no matter what type of business your company does.
What exactly is income tax? Simply put, income tax is what the government takes away from your profits based on the income. Employees have to pay income tax as well on their salaries – the two are exactly the same, only one applies to workers and the other to businesses. This is where the complexity ends in most places around the world – but not in the US.
In the United States, there are three types of corporate income tax:
- Federal Income Tax
- State Income Tax
- Local Income Tax
The Federal Income Tax must be paid by all companies in the United States that have generated any income. The tax is levied by the Internal Revenue Service (IRS) and, in contrast to individual income tax, features a flat rate of 21%. Keep in mind that corporate income tax rate is not applicable to partnerships or S corporations.
In addition to the Federal Income Tax, you might also have to pay the State Income Tax. Depending on the state you live in, this value will change – some states like Texas, Wyoming, Nevada, or Florida do not feature a State Income Tax, while other states like New Jersey feature a high State Corporate Income Tax (11.5% for 2022). The states that do not impose a state corporate income tax instead impose gross receipts taxes.
Finally, the Local Income Tax depends on the city you live in – some charge this additional tax and some do not. The vast majority of jurisdictions within the United States do not feature the local income tax – however, you’ll still have to pay it in some locations across 17 states, primarily Ohio and Pennsylvania. The value of this tax will also be specific to your location, so make sure you find that out before establishing a company in the US.
By When Do I Need To File My Income Tax?
All types of income tax have their own deadline as well. In most cases, the deadline for filing federal CIT is April 15 – the same as for individual income taxes. This date can be extended a couple of days if the 15th falls on a holiday or a weekend, but generally speaking this is the date you should prepare all the relevant documents until.
Keep in mind that in case of partnerships and S corporations, you’ll have a slightly shorter deadline, which usually falls on March 15. In all cases, you can get a 6 month extension on filing your income tax return, but you’re still required to estimate your tax liability and pay the amount due. In case your company is filing taxes on a fiscal year and not a calendar year, your taxes will be due by the 15th day of the fourth month following the end of your tax year.
The deadlines for state and local income taxes are specific to each location, so make sure you are familiar with the local regulations or work with a tax advisor to find everything out.
If you need more time, remember to file for an extension!
Payroll Tax: What’s Included?
Income tax is simple and usually doesn’t require tons of calculations to figure out. Unfortunately, payroll tax is a bit more complicated than that. There are four taxes in total included in the payroll tax: FICA tax, FUCA tax, as well the federal and state income taxes. These taxes technically aren’t paid by your company, but instead by your employees, but you’re still required to withhold the proper amount of money from each of your worker’s salaries.
Since payroll tax is troublesome and time-consuming to calculate, many companies use online payroll services for businesses. These services do most of the work automatically and are updated to keep up with the newest regulation changes, making sure there’s nothing wrong with your tax returns each year.
The due date of your payroll tax will depend on a range of factors, including your location – each state features specific rates and deadlines that you’ll have to work with. Find out more by looking up your local regulations or asking your tax advisor.
How To Calculate Your Sales Tax?
Depending on the state you live in, you’ll also have to pay a varying Sales Tax. Most states range between 4% and 7%, with the average being approximately 5%. The highest sales tax in 2022 is featured in California, with a State Tax Rate of 7.25%. There are also five states without a sales tax at all – these include Oregon, New Hampshire, Montana, Alaska, and Delaware.
Sales tax is often described as the most difficult tax to calculate and get right on the tax return, as the rate varies depending on many factors. The deadlines also vary from state to state, so it’s always best to look for more information in your local regulations – or find professional help with filing your taxes in the United States.
As you can see, it’s definitely not easy to file your taxes in the United States – especially if you have no experience in doing so. Here at Mükellef, we’re dedicated to helping budding entrepreneurs establish and keep accounting for startups in the US. If that’s you, contact us – we will help you start your company in the US from anywhere and provide you with all the updated tax-related information and advanced online bookkeeping software!