Our customers have all kinds of questions about taxes, including: what small business taxes should I plan for? Unless you have a background in finance or accounting, this is an area many small business owners don’t pay much attention to during their planning. In this post, we’ll give you a primer on the basics, the small business taxes that matter most, and the role taxes have in getting your business funded using your invoices.
What Are the Most Important Small Business Taxes?
While it’s important to pay all the taxes your small business owes, some types of business tax can impact your business finances more than others, especially depending on your business structure.
Payroll taxes are a percentage of the employee’s wage deducted from the employee’s pay and a percentage paid by the employer based on the employee’s wage. The reason they’re so important to keep up with (aside from avoiding penalties) is that if you don’t pay them there is no corporate protection. If you are an executive or board member of a company and the company owes small business taxes for employee payroll, you are still personally liable. On payroll taxes, the government has super priority, meaning they will get paid before any lenders or any other outstanding debts your business might have. The government can also garnish the company’s assets (i.e. Bank Accounts) to ensure that any outstanding payroll taxes get paid.
Sales tax rates vary based on the province/state you’re located in. If you sell physical goods or services, you’ll likely need to collect sales taxes (although there are exceptions for both). For digital products, it varies more widely by province/state. For sales that happen across provinces/states, sales tax isn’t generally collected (although in the USA, this has been contested in the Supreme Court).
Unfortunately, many small business owners take the sales tax they collect and use it as a source of extra cash instead of setting it aside, planning to make it up later. It’s easy to see why this can lead to trouble, especially if poor cash flow was the reason behind doing this in the first place.
Excise taxes are the taxes (or duty) on manufactured goods that is charged at the time of manufacture rather than at sale. Excise taxes are only applied to certain kinds of businesses, industries, goods, and services, so it may not be applicable to your specific business.
In the U.S., self-employment tax encompass your FICA tax and includes both Social Security and Medicare taxes. Typically, a salaried employee splits these costs with their employer, but since small business owners are both the employee and the employer, they have pay it all. In Canada, you’re responsible for both the employee and employer Canada Pension Plan (CPP) contributions, as well as employment insurance premiums.
Capital gains tax
The capital gains tax is the tax charged on the profit made when an investment is sold. It is owed for the tax year during which the investment is sold. If any of your business investments appreciate or you make a profit on the sale of business assets, you’ll likely need to pay the capital gains tax. The capital gains tax rate varies and is based in part on whether your gain is long-term or short-term.
Dividends are a type of business profit that is paid out to shareholders. Dividends are taxed depending on your income level and tax filing status. If you are a shareholder in your business, you may be subject to dividends taxes.
Corporate income tax
Corporate income taxes are a direct tax on your profits. It is paid after you complete your filing of your Annual Income Tax return. Business income tax rates vary by country. You can use various deductions, provincial/state and federal government subsidies, and tax loopholes to help lower your effective corporate tax rate — which is the rate a corporation actually pays, as opposed to the statutory rate — the stated rate before any deductions are calculated.
Small Business Tax Incentives
It might seem like the number of small business taxes is a lot, but there are things you can do to reduce your federal taxes as well as provincial/state taxes.
Maximize available business tax deductions
This first step to reduce business taxes is to make sure you’re maximizing your available tax deductions when filing your return. Where your business is located will determine the eligible business expenses you can claim. Business eligible expenses reduce your total taxable business income, and ultimately the amount of small business taxes you have to pay. To make sure you aren’t missing out on eligible opportunities, it’s worth consulting with a tax professional.
Take advantage of business tax credits
There are a wide range of provincial, state, and federal business tax credits available to businesses of all sizes across various sectors. Simply by spending a bit of time checking to see if your organization is eligible for any of these credits could end up saving you when you file your business tax return.
What if I’m Facing a Small Business Tax Issue?
Both the Canada Revenue Agency (CRA) and Internal Revenue Service (IRS) offer payment plans for back taxes, penalties, and interest if you owe them. If you’re facing small business tax problems, working with a chartered professional accountant (CPA) or tax attorney along with these agencies will put you on the path to settling your small business taxes. You can also get help from FundThrough to manage your cash flow to meet the tax liabilities.
Why Do Small Business Taxes Matter for Invoice Factoring?
At FundThrough, small business taxes matter to us as we need to know that we’re funding an invoice free of any claims. (Get more information on why we need tax documents before funding). But, we also work with businesses who are on tax payment plans with the IRS and CRA all the time. If we discover taxes owed during the approval process, we can even help you with getting a tax payment arrangement set up. This enables the business to get current again on their small business taxes and opens up the possibility of getting your invoices funded.
Small Business Tax Basics
Below are a few key points about small business taxes; while this is basic information, it’ll establish context for anyone who isn’t familiar with this topic.
- Every small business has to file a tax return. The way you file will depend on what kind of business entity you have. (e.g., a sole proprietorship will report income and losses on their personal tax return, a corporation or LLC will have to file a separate corporate tax return.)
- Expect to pay taxes monthly or quarterly. If you have a tax balance for a Canadian business and owe more than $3,000 in taxes for the previous year, you’ll have to pay monthly instalments. In the U.S., “C” corporations pay taxes at the corporate rate; small business owners, sole proprietors, and freelancers who expect to owe at least $1,000 need to estimate their quarterly taxes.
- You’ll need a way to identify your business in your tax return. If you’re in Canada you’ll need to obtain a tax ID number from the CRA; the U.S. equivalent is an Employer Identification Number (EIN) from the IRS.
- Putting them off will cost you. In both countries, expect to pay interest and penalties for filing late or not at all.
- Turn to a professional for help. Because of the risk of tax problems and expertise required to avoid them, you might be better served turning to an accountant or CPA to file your business tax return.
How Invoice Funding Helps Small Business Taxes
Invoice funding can help small businesses with their taxes in a number of ways. First, we work with businesses who are on tax payment plans with the IRS and CRA all the time. If we discover taxes owed during the approval process, we can even help you with getting a payment arrangement set up. This enables the business to get current again on their small business taxes and opens up the possibility of getting your invoices funded.
Additionally, by funding invoices, you can unblock cash for work you’ve already done that’s tied up in slow receivables. You can then use these funds to close your books with confidence, cover your tax balance without going into debt, and even fund at strategic times to bolster your books.
With invoice funding (also known as invoice factoring or receivables financing) a business owner sells invoices to a factoring company. The business owner receives cash for the invoice amount, usually less fees, ahead of the payment terms. The business owner’s customer, who is responsible for paying the invoice, instead pays the invoice amount to the factoring company according to the original payment terms. It provides complete confidence knowing that your cash is secured by an expected invoice payment.
Cash flow issues are a major challenge for small business owners, often due to long payment terms their customers expect. If you want to speed up cash flow or sort out your business tax obligations with quick access to funding, a factoring company like FundThrough can help.