When the term business tax is used, it is often seen as a burden by most of the business owners. But it acts as a source of funding for the government, which is used to support the economic growth of the nation. Business taxes are categorized into various types that are imposed on different sectors with different rules and regulations.
So, all taxpayers need to know about the types of taxes and where they are imposed for better financial management. In this guide, we will give a detailed explanation of all types of business taxes, which will help you in times of taxation.
What is Business Tax?
Business taxes are considered the backbone of the nation’s development. Business tax is the tax that a businessman needs to pay on income earned from their business. This is the tax that the government imposes on businesses, which has become one of its significant sources of funding for social services.
Every business needs to pay taxes on its profits, and the business tax encompasses various types of taxes. But it depends on several factors to pay taxes, such as business structure, whether you hire employees or not, and also on where you operate your business. These taxes are not only paid for public benefits, but business taxes are the key ingredient in this social contract between people and the economy.
Types of Business Tax
It is important to understand all types of business taxes to run a business. There are various types of business taxes, and the major ones are federal taxes, state and local taxes, and international taxes. These taxes are also sub-categorized, which are created differently and come with specific rules and regulations.
Federal Tax
Federal taxes play a vital role in funding the government for national services, running different educational programs, etc. Federal tax is the tax collected by the government on income, payroll, and other activities of businesses. Businesses need to follow the rules and regulations of these taxes while calculating their taxes.
Federal Income Tax
Federal income tax is one type of tax that the government imposes on the annual income of individuals who earn money, various corporations, and other businesses. This tax rule applies to the money you earn from your business or from investments. This rule also helps you to get some credits and deductions that can reduce some money from your tax amount.
Federal Payroll Tax
Payroll tax plays an important role in funding the government to run special programs. This tax will be imposed on the employee, and the tax is automatically deducted from their wages. Employers pay payroll tax in the form of unemployment benefits.
Federal Excise Tax
Excise tax is imposed on some goods and services. This tax will be applied when people purchase goods or take services.
What are the State and Local Taxes?
State and local taxes are imposed on the profits of businesses. Sales taxes and property taxes are included in the state and local taxes. Sales tax is imposed on goods and services, while property tax is imposed on the property of businesses. The tax rates are different in different regions.
What is International tax?
International tax is the tax that is applied to the profits of the cross-border activities of individuals and companies. It is essential to understand how domestic laws apply to non-residents who earn income in the country and how the country taxes its residents’ foreign income. So, it is important for businesses that operate internationally to understand International taxes, because these taxes are difficult to manage. The rules of this tax differ in every country and may require navigating different tax systems and regulations. International taxes are of different types, such as income taxes, indirect taxes, double taxation taxes, transfer pricing taxes, customs and trade taxes, capital gain taxes, payroll and social security taxes.
Before knowing all the types of international taxes, you should know the principles of international taxation. The residence-based taxation and source-based taxation are the foundational principles of international tax law. The resident tax system imposed taxes on its residents’ worldwide income. While the source-based tax system imposes tax on the income where it is earned.
What are income taxes?
Income tax is a tax that is directly charged on the annual income earned by an individual or a company in a financial year. Income taxes are of 3 types: Corporate income tax, personal income tax, and withholding tax.
Corporate Income Tax
The corporate income tax is imposed on the income of businesses by the federal and state governments. Corporations are allowed to reduce some of their taxable income by some necessary business expenditures. They can deduct employee salaries, health benefits, and bonuses. They can also reduce their taxable income by deducting the insurance premiums, travel expenses, sales taxes, and fuel taxes.
What is a personal Income tax?
Personal income tax is defined as the tax levied on an individual’s income. The tax on personal income is collected by the personal income tax division of the IRS.
Withholding Tax
This tax refers to an amount of money that is deducted from the employee’s gross wages by the employer and paid directly to the government.
What is an indirect tax?
Indirect tax is collected from the consumer through the price of goods and services. It is of 3 types: VAT, GST, and sales tax.
How Value Added Tax Works?
This is the tax that is imposed on goods and services at every step of the supply chain. It is charged at each stage, starting from production to distribution. The final consumers will pay this tax while purchasing any goods or services.
What is GST Tax?
This is known as one of the forms of VAT that is levied on the goods and services that are sold domestically.
Sales Tax
Sales tax is one type of indirect tax that is levied as a one-time tax at the time of purchase. The consumer pays the sales tax to the retailer, and the retailer pays it to the government.
What is Double Taxation?
It is the tax that is levied twice on the same source of income. Double taxation occurs when the tax is applied at both the corporate and personal levels.
Capital Gain Taxes
This is one type of tax that is imposed at the time of the sale of an asset. The capital assets refer to the stocks, cryptocurrencies, and real estate.
Business Tax Saving Tips for Businesses
Small business tax filing is an annual responsibility for all businesses. While filing the business tax, small businesses must understand all deductions and credits that will make a difference in their business structure.
Deductions and Credits
Most of the business expenditures can generate tax credits and deductions, which can reduce the tax amounts. Accrued expenses are used to maximize the deductions by recognizing the expenses when they are incurred.
Retirement Plan
You can get eligible for tax deductions when you contribute to a retirement plan. It is important to choose the right retirement plan according to your business size.
Health Insurance
Health benefits are one of the most important factors that will help reduce the tax amount. When you contribute more to the employees’ healthcare, you will get a chance to reduce your tax amount more.
Conclusion
We hope this guide on business tax will meet all your expectations. In conclusion, we want to say that before calculating your business tax note all the types of business taxes and their rules and regulations. If you want to know more or face any difficulties, then you can seek professional help.