Businesses pay a lot of taxes for several different things each year; these include income taxes, sales taxes, and payroll taxes. Sometimes, it’s difficult to keep them straight, so here is a simple breakdown.
Taxes payable represents a liability or an obligation a business needs to pay. This liability needs to pay taxes to several agencies, including the federal government, the state government, and the city government. You may chose to pay your business’ taxes monthly, quarterly, or annually, depending on its size and obligation. Taxes payable increases when the company gains additional tax obligations and decreases when the company makes payments.
Income tax refers to money the company owes based on its earnings. All businesses except partnerships must file an annual income tax return. (Partnerships file an information return.) The form you use depends on the business entity you have established. You can read more about which business entity is right for you here.
Sales tax refers to money the company collects from customers within their borders and sends to the state tax collector. In most states, each retail sale is taxable, and recently, more states have expanded the scope of their sales taxes to encompass leasing transactions and even some services. As the business owner, you are responsible for knowing what items or services are taxed at which rates.
Payroll taxes refer to money your business owes based on employee wages. They include federal unemployment tax, state unemployment tax, Social Security tax and Medicare tax. Businesses use an employee’s W-4 form to calculate how much federal income tax should be withheld from each paycheck. It’s important to remember that all money an employer pays its employees is subject to payroll tax, not just standard salary, wages and tips. Be sure to keep excellent records so that you are able to file and pay this tax properly.
Do you need help keeping excellent records? Contact us to Find out how we can help you get organized.