What Taxes Do Small Businesses Pay in the U.S.? A Beginner's Guide

Starting a business is exciting, but it also comes with tax responsibilities. The businesses pay various types of taxes and it depends on several factors, including your business structure, where your business operates, whether you have employees, and the products or services you sell.

The good news is that not every business pays every type of tax. Understanding the major categories is the first step toward understanding your obligations.

Why Different Businesses Pay Different Taxes

There is no single tax that applies to every business. The taxes that apply to a business depend on factors such as:

• Business structure (Sole Proprietorship, Partnership, LLC, Corporation, etc.)
• Whether the business has employees
• The state(s) where the business operates
• The products or services it provides
• Whether it manufactures, imports, or sells goods subject to special taxes

This is why two businesses operating in the same city may have different tax responsibilities.

Source: Internal Revenue Service (IRS) – Business Taxes

Types of Taxes paid by U.S. Businesses

Businesses may encounter several different taxes during their lifecycle. These generally include:

• Federal Income Tax
• State Income Tax (where applicable)
• Self-Employment Tax
• Employment (Payroll) Taxes
• Sales and Use Tax
• Excise Tax
• Franchise or Business Taxes (in certain states)

However, not every business pays all of these taxes.

What Is Federal Income Tax and what is state income tax?

Federal income tax is a tax imposed by the U.S. federal government on business income. The Internal Revenue Service (IRS) administers federal income tax.

Some states impose income tax on businesses or business owners, while others do not. Each state sets its own tax rules, tax rates, due dates and filing requirements.

What Is Self-Employment Tax?

Self-employment tax generally applies to individuals who work for themselves rather than as employees. It depends on how the business is organized and how the owner receives business income. It helps fund Social Security and Medicare programs.

Source: IRS – Self-Employed Individuals Tax Center

What Are Employment (Payroll) Taxes?

Generally, payroll tax applies once a business hires employees. Payroll taxes may include:

• Withholding certain federal taxes from employee wages
• Paying applicable employer payroll taxes
• Reporting wages and tax withholdings to the IRS

Source: IRS – Employment Taxes

What Is Sales Tax?

Sales tax is generally imposed by state and local governments on the sale of taxable goods and certain services. Unlike federal income tax, there is no federal sales tax in the United States.

Sales tax rules differ significantly from one state to another. Some states do not impose statewide sales tax, while others have additional local sales taxes.

Source: USA.gov – Taxes

What Is Excise Tax?

Excise tax is a federal tax that applies only to certain products, services, and activities. Most small businesses never encounter federal excise tax because it applies only to particular industries.

Examples include taxes on:

• Fuel
• Alcohol
• Tobacco
• Certain transportation activities
• Specific manufactured products

Source: IRS – Excise Taxes