When dealing with the accounting side of a small business, there is a lot more to think about than just federal taxes. State and local taxes make up a large chunk of the yearly taxation that you will be obligated to pay. Because every situation is different and every location has differing requirements regarding what you may or may not be responsible for financially, it is up to you to be in communication with your state and local governments. However, there are a number of fundamental guidelines and principles that are true for most state and local taxes throughout the country. These are detailed below.
On a basic level, there are two types of taxes that a business within any particular state is responsible for. These are state income taxes and state employment taxes. Here is a summary of each.
- State Income Taxes: These taxes apply to all businesses, but vary greatly according to what type of business structure you have, what state you operate business in, whether or not you are required to make estimated payments, and a myriad of other factors. One major factor that will affect how your state income taxes are charged is whether your business taxes are included with or taxed separately from your personal income taxes or those of the principal owner. Your tax structure as a limited liability company or sole proprietorship may affect whether or not you must make tax payments throughout the year or simply pay your taxes at the end of the tax year when you file your return.
- State Employment Taxes: If your business has employees who are on payroll, you are likely to be responsible for paying a state income tax on their behalf. You will be instructed to do this by withholding a certain figure from their pay. Depending on the situation and the nature of your business, you may also be responsible for paying an unemployment tax or compensating state workers for their insurance fees. Keeping accurate and complete financial records for your business and your employees is also a major aspect of your responsibility to the state, and you may be required to keep your employees’ payroll and tax records for a specified amount of time.
Being taxed on a local level may mean paying certain fees or percentages of your income to the city or county in which your business is located. Because city and county laws vary so widely in regards to taxation, it is necessary that you consult your local government to determine what taxes you are obligated to pay, if any, and how often.
Here are some examples of taxes on the city or county level that may apply to your business. You may be required to pay an operating tax or file for a local business license in order to legally operate as a business. If you are involved in selling a product or service, you may have to pay a retail sales tax. A property tax is another common tax that businesses must account for. Those businesses that are located in larger metropolitan areas may be responsible for an income tax paid to the local government of the city.
Once you have acquired your Employer Identification Number (EIN) from the federal government as a business, one of the next steps is to familiarize yourself with the state and local taxes that you are obligated to pay. Keep in mind that it may also be necessary to apply for a similar EIN from your state or local government. By keeping up with the requirements mandated by the various branches and levels of government, you will do your part as a fiscally responsible business owner or employer and avoid receiving any penalties.
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