Taxes can be one of the hardest things to understand when you are starting your own business. Here are some simplified explanations of the business taxes that you should be aware of as a small business owner
Governments use taxes to fund public spending. It’s the main source of income for a government. However, if you are a small business owner, keeping up with the taxes might be stressful.
Taxation regulations work differently depending on the country that you live in. However, in this article we listed some common taxes that you might face:
1 – Value-Added Tax (VAT)
Value-added tax must be charged to your consumer if the company is registered for VAT. VAT is based on the production process. It’s reflected as a fixed rate. The average VAT rate was 19% in 2022 according to Global VAT Compliance. The standard VAT rate is 21% in European Union.
2 – Income Tax
Income tax can be divided into two subsections: personal income tax and corporate income tax. Income tax is imposed on the earnings. The structure of your business establishes how you should pay your income tax. Although, regardless of your business structure, each business pays income tax. The structure of your business may be:
a) Sole Proprietorship: Your business is not separate from you. You file your taxes as personal income tax since your business and assets are not thought to be separate. You have unlimited liability.
b) Partnerships: Can be limited partnerships where one partner has limited, the other has unlimited liability, or it can be a limited liability partnership in which no partner has unlimited liability.
c) Limited Liability Corporations (LLC): Owners cannot be affected by the downfalls of the business such as debt, lawsuits, etc. The assets of the owners are protected.
d) Corporations: There are many types of corporations. It’s the most complicated of the business structures. The corporation itself is a separate legal entity from its owners. That causes double taxation. Corporations are taxed by their profits, and then again owners are taxed when that income is distributed as dividends.
3 – Self-Employment Tax
Collected from individuals who work for themselves.
4 – Employment taxes
If you have employees on your payroll, you must pay taxes on their behalf. These taxes may be related to social security, healthcare, unemployment, federal income taxes, etc.
5 – Excise Tax
Excise tax is imposed on only certain types of goods or services, and the excise tax rate is higher than usual. Pimaccounting explains that excise tax is used for products that have detrimental effects on health, nature, etc. such as gasoline.
6 – Property taxes
Collected from buildings and land. Regardless of the type of building such as commercial, office building, shop, etc., all buildings are taxed.
7 – Advertisement Tax
Might be called Label tax as well. Collected from signboard usage.
8 – Specific Business Taxes
Certain taxes are only implied on certain types of businesses in specific industries such as banking, insurance, etc.
As a business owner, you should pay extra attention to taxes. Depending on your structure, industry, size, and the services and/or products you offer, you might face different types of taxes. Unfortunately, taxation is not a “one size fits all” system. Knowing your country’s taxing regulations is crucial since you may be penalized by law for disobeying taxation regulations. If you are hesitant about how to manage your taxes, you can consult tax lawyers or accounting firms to get more information.