The United States has a multi-level income tax system whereby taxes are imposed on people who are filing for a business by federal, state, and local governments. The amount of both federal and state income taxes due is determined by applying a tax rate to the business’s taxable income. These rates differ between federal and state and also from state to state.
Federal income taxes are progressive; the higher the income, usually the adjusted gross income (AGI), the higher the tax. Most states also have progressive taxes, although some have a flat rate. Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming have no income tax at all; New Hampshire and Tennessee tax interest and dividends only.
Other Business Taxes
The IRS collects two additional types of business taxes:
- Employment taxes including FICA taxes (Social Security and Medicare), federal unemployment tax (FUTA), and the taxes a business withholds from its employees’ pay.
- Self-employment taxes for those persons who are self-employed, work as independent contractors, or are owners, shareholders, or partners in a pass-through business like a sole proprietorship, partnership, Limited Liability Company (LLC), or Subchapter S corporation.
Various states collect various additional business taxes such as franchise taxes, alternative minimum taxes (AMTs), and employment taxes like unemployment insurance, state disability insurance, and/or employee training taxes.
Which Taxes Your Business Pays
The type of business you are and the state in which you are located determines which business taxes you will pay.
A pass-through business does not pay its own income taxes. They are, however, required to file an annual informational tax return using their own Employer Identification Number (EIN). Your business can grab an EIN form with the IRS or use a third-party provider like Gov Doc Filing that often simplifies and expedites the process.
A pass-through business entity’s income taxes are recorded and paid by its owners, shareholders, or partners via a Schedule C attached to their individual tax return.