Question by Deborah C: Small business taxes? I am thinking of starting a small business.. Our new president is talking of tax?
breaks for small businesses.. but right now I am forming a small business plan, and need to know about how much taxes are for small businesses. I am sure there is a tax for whatever the community charges, and then county taxes and then federal taxes.. it takes my breath away just thinking about it. Just wondering what a small business that makes say 50 grand a year to (wishful thinking 100,000) a year would overall pay out in taxes… I would really like someone to throw out some “tentative numbers”… if you can. If you know of a “quick” site that launches some numbers that would be nice too. thanks
Best answer:
Answer by acmeraven
Go to IRS.GOV and look at the free Pub 17 for guidance. On a personal level I would advise against going into business during this death spiral time in our economy; it is going to get worse before it gets any better. Be sure that whatever your risk exposure is that you can walk away from it if you have to.
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There’s really no way to say with any accuracy. I’ve yet to see a good business plan that addressed income taxes. Income taxes are what they are and there’s not a lot that you can do about them. The only taxes that your business plan would address are those taxes that the business will have to pay regardless of what the profits are. Those would include property taxes, sales taxes on items used in course of the business, payroll taxes (as part of your employee costs), etc.
Assuming that you’re operating as a Sole Proprietor, the business income is reported on your personal income tax return and is taxed there. Only the net profit is subject to taxation. You’ll pay self-employment taxes at roughly 14.1% on the first $ 106,800 of net profit for 2009 and 2.7% beyond that. The income tax will depend upon the usual variables such as other taxable income, marital status, number of dependents, itemized deductions, credits, etc.
As far as what impact future legislation might have, ignore that until it becomes law and then adjust your business plan accordingly. A business plan is not a static document; it must be regularly updated as laws change and your business goals change.
As your business operates you need to stay on top of the finances on a regular basis. You’ll need to make quarterly estimated income tax payments but may well need to adjust those up or down as your profit picture changes.
I’d strongly urge a consultation with a CPA or EA who specializes in small business issues and taxation before you start. They will help you develop your business plan, set up a bookkeeping system that will pass the IRS muster, and project your required tax payments.
If you need a VERY rough “cocktail napkin” estimate, start with 30% of the net profit for Federal income and self-employment taxes, plus whatever your state’s income tax rate is. If you get lucky and your business really takes off that may rise significantly (up to a point; once you hit the Social Security earnings cap it will drop for a while) but you’ll have the profits to pay the taxes from as well as a lot more money for YOU at the end of the day.
There are 3 primary reasons why new small businesses fail. In order of importance:
1. Failure to plan. The cocktail napkin is a starting point only. The primary goal is to generate taxable income. NEVER lose sight of that!
2. Inadequate capitalization. You can replace a lot of liquid capital with “sweat equity” but be prepared to work upwards of 80 hours per week to get it off the ground.
3. Failure to manage the entire business. Fretting about taxes and forgetting to generate taxable income in the first place will kill you in a matter of months.
I wouldn’t decide to start or not to start a small business based on what the taxes or tax break changes might be.
If the small business is just you, which I assume it would be while it was in the $ 50K range, you’d be likely to pay the same income tax as if you made that same amount working for someone. In addition you’d pay 15.3% self employment tax, for social security and medicare, instead of the 7.65% you’d pay working for an employer, since they’d pay the other half.
There might or might not be additional taxes, depending on your location and what your business is. If you hire an employee, there are taxes that come with that.