As tax season is fast approaching, you might be one of those people who are preparing to file for tax. And you keep asking yourself: how business income is taxed? Well, there are different methods used to tax businesses. The process of filing for tax is more or less the same for all businesses. All businesses are expected to do the following:
- The first step is to gather information about your income, expenses, deductions, tax credits, and so on.
- Then calculate a net income from your income and expenses account.
- Next up, record the amount of taxable income on a special report form. This form depends on the type of business that you run. So always make sure that you use the right form.
- From there, include a taxable amount for your business on your individual tax return. Of course, that includes income and expenses.
Do all businesses have to pay the same tax?
The size of your business matters when it comes to the amount of tax that you should pay. Normally, large corporations pay more in taxes compared to smaller businesses. Currently, the United States imposes a tax on the profits at a rate of 21 percent. The amount of tax that you pay will depend on whether you run a sole proprietor, a partnership, or a corporation.
- A sole proprietor is expected to complete Schedule C. Then the amount of tax will be calculated similarly to personal tax. Additionally, sole proprietors are expected to file Schedule SE and pay the self-employment tax.
- Because a corporation can represent it on its own right, it pays income tax at the corporate tax rate.
- Meanwhile, an S corporation is charged using a personal rate of the owners.
Always make sure that you know how your entity will file for tax, and what forms you should fill out. If you think you don’t have the know-how of doing this, you can always hire a tax practitioner to do it for you. A tax practitioner will help you to structure your financial reports and make sure that they are a true reflection of your financial status. Most tax practitioners make use of tax software that allows them to compile reports faster, then save them in the cloud. Remember, the tax season will begin on the 1st of January 2021 and end on 15th of April. The sooner you file for your tax returns, the better.