Business taxes play a huge role in the economy of the United States. In a country built on capitalism, the opportunity to build your own business is available to all.
The taxes that come with running a business are critical to the country’s economic growth.
Taxes not only pay for public goods and services, like schools and police departments. How they are raised and spent is massively essential to the legitimacy of a government and its nation’s development.
Effective tax administration can help to encourage business growth and increase tax revenues.
The importance of taxes in supporting programs and services that improve citizens’ lives is vital.
There are several different forms of business tax which include:
Income Tax
All businesses across the United States will file an annual income tax return, except partnerships that file an information return.
Income tax is calculated as you earn and receive income throughout the year.
Employees will often have income tax immediately withheld from their pay.
All income tax is utilized to effectively pay government obligations, fund public services, and provide goods for citizens.
Self-Employment Tax
This is a social security and Medicare tax for individuals who work for themselves.
Social Security payments provide coverage such as retirement benefits, disability benefits, and medical insurance (Medicare).
To pay your Self-Employment Tax, you must file Schedule SE (Form 1040 or 1040-SR).
Those to who Self-Employment Tax payments apply are people who make more than $400 in self-employed earnings.
It is worth noting that there are exceptions for certain people, such as fishing crew members, government officials, and international organization employees.
Employment Tax
For employers, there are specific employment tax responsibilities that fall on them. At the end of the year, employers complete and submit Form W2, to report wages, tips, and other compensations paid to their employees.
There are several forms and payments which must be completed, which affect the following:
- Social Security and Medicare Taxes – these have different rates, and only the social security tax has a wage base limit. An employer generally will withhold these taxes from an employee’s wage and pay the employer’s share of the taxes.
- Federal Income Tax– this is generally withheld from employees’ wages, and employers should use Form W4 to figure out how much tax to withhold. And also use a fillable form 941 to report the taxes that were withheld from employees’ wages.
- Federal Unemployment Tax– this is paid separately from Income Tax. It is paid solely by the employer and is not to be withheld from the employee’s pay.
Excise Tax
These are taxes placed on various goods, services, and activities, often imposed on manufacturers, retailers, and consumers.
The federal excise tax is reported through Form 720 and consists of several broad categories, including:
- Environmental Taxes
- Communication and Air Transport Tax
- Fuel Tax
Sports wagering is also subject to excise tax since the Supreme Court ruled in 2018 that the Professional land amateur Sports Protection Act be abolished and allowed individual states to decide whether they would make it legal.
Many states have due to the large tax revenue it provides. Form 730 is required to be completed for each month for which taxable wagers are being reported.
0.25% of the amount wagered is to be the excise tax. Moreover, an annual occupational tax worth $50 applies to each agent or principal accepting wagers.
The American tax system is complicated, though it is set up to aim to provide the best quality of living for its residents across each state.
A thorough understanding of what is required when completing your tax returns is vital for businesses to run effectively and legally.
The punishments for tax avoidance can be severe, which is why trained professionals are available to help small and multinational businesses understand their obligations.
Rates can often vary as well as the requirements to which they detail, so a thorough understanding and regular updating of the law will help businesses thrive as well as the country.
