Our customers have all kinds of questions about taxes, including this one: 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 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 taxes, some can impact your finances more than others.
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 payroll taxes 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. They can also garnish the company’s assets (i.e. Bank Accounts) to ensure the taxes get paid.
Sales tax rate varies 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 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.
Corporate Income Tax
This is a direct tax on your profits. It will be paid after filing the Annual Income Tax return.
What if I’m facing a tax issue?
Both the CRA and IRS offer payment plans for back taxes, penalties, and interest if you owe them. If you’re facing tax problems, working with a CPA or tax attorney along with these offices will put you on the path to settling your taxes. You can also get help from FundThrough to manage your cash flow to meet the tax liabilities.
Why do taxes matter for invoice factoring?
At FundThrough, 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 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 an arrangement set up. This enables the business to get current again on their taxes and opens up the possibility of getting your invoices funded.
Small business tax basics
Below are a few key points about taxes; while this is basic information, it’ll establish context for the rest of this article 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 installments. 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 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.