Navigating corporate taxes can be complicated, no matter your industry. After all, you need to consider the different levels of taxation, from federal to local. Also, different business entities can be taxed differently.
In this blog, we’ll walk you through the intricacies of business tax payments, to help you make the most of potential benefits, and avoid possible penalties. This will also help ensure that your company is compliant with current tax laws.
Federal Taxes
Implications and rates for corporate taxes vary depending on your business entity. For instance, C Corps can be subject to double taxation, unlike S Corps or partnerships. This also extends to the different types of federal taxes your business needs to pay.
Generally, your federal corporate taxes comprise five categories:
Income tax: According to the IRS, all businesses need to file an annual income tax return. This excludes partnerships, which submit an information return. How much you pay will depend on the corporate rate for your business entity, but you must submit a return for any money received during the tax year.
Estimated taxes: These need to be filed for sole proprietors, small businesses, self-employed individuals, and C Corps expecting to pay above $1000 in taxes annually. These must be paid quarterly, by set deadlines.
Self-employment tax: This applies to anyone who is self employed, as well as members of LLCs and partnerships. This payment covers Social Security and Medicare and applies if your net earnings are above $400 for the tax year.
Employment taxes: If you have employees, your business must meet certain responsibilities. This includes social security and Medicare for employees, federal income tax withholding, and federal unemployment (FUTA) tax.
Excise tax: This does not apply to all businesses. However, if your company trades in the specific goods or services subject to this tax, you’ll need to file for excise tax using Form 720 or Form 2290.
Paying federal taxes
Just as there are a few different kinds of federal corporate taxes, there are several ways to pay them. These include:
- The Electronic Federal Tax Payment System (EFTPS): This is a free service offered by the Department of the Treasury, to pay taxes electronically. To use it, your business must enroll in the system.
- IRS Direct Pay: Here, you can make payments directly from your bank account, without having to pay fees. Note that it is limited to certain types of taxes.
- Card payments: These can be made through authorized payment processors. As such, they may be subject to processing fees.
- Wire transfers: The IRS accepts wire transfers for large payments, although these might come with bank charges.
- Checks or money orders: If you’d prefer a paper approach, the IRS accepts checks and mail orders sent directly to them. Just remember to send them with enough time to pay by the tax deadlines.
- Payment plans: If you can’t pay the IRS everything you owe at once, it’s possible to request an installment agreement. However, this may come with setup fees and interest.
It’s not enough just to know what and how to pay your corporate federal taxes. It’s important to ensure that your returns are completed correctly. Not only does this make your life much easier, but it also reduces the risk of unnecessary IRS scrutiny, which could lead to processing delays, penalties, or even audits.
This means that your business will need to avoid some common errors.
How to avoid common filing errors
Mistakes happen, especially when you need to consider up to five kinds of taxes just for your federal returns. So when your company is completing a return, there are a few things to keep in mind.
To begin with, be aware of deadlines for corporate taxes, to avoid the frustration and potential penalties associated with last-minute filings. It is possible to file for an extension, but it’s better to avoid this if possible. After all, an extension gives you more time to file, not more time to pay.
If you submit payroll taxes, it’s essential to classify your employees correctly. Misclassifying workers can lead to penalties for your business, and issues for your staff.
Similarly, any other information you submit should be double-checked to avoid errors. This includes using the right forms and schedules. When dealing with the IRS, accuracy is key. That also means you’ll need to ensure the supporting documents and records for your returns are in order, especially if you claim any credits or deductions.
State Taxes
In addition to federal taxes, your business is also liable for state corporate taxes. And this is where things can get really complicated. After all, tax rates and requirements vary between states. For instance, some states, like Texas, don’t levy income taxes. Others may have unique credits or incentives, like Georgia’s approach to unclaimed property.
But there’s more. When it comes to working across state borders, you also need to navigate multi-state taxes, which depend on your economic nexus.
As with federal taxes, there are different kinds of state taxes. These include:
- Income tax. Currently, 44 states levy corporate income taxes, at varying rates.
- Sales and use tax. Depending on your products and services, you may need to pay sales and use taxes. Currently, 45 states impose this tax.
- Property taxes. Some states also impose taxes on property, which can be tricky for very large businesses or those with multiple locations.
- Franchise or capital stock taxes. These taxes are based on your business’s net worth instead of income. Thankfully, they’re only levied in a few states, like Texas.
- Excise tax. Just like at the federal level, some states also levy excise tax.
- Gross receipts taxes. States like Washington have gross receipts taxes on your company’s total revenue instead of net income. These can apply even if your business isn’t profitable.
When it comes to paying state taxes, your business can make use of the same options that exist for federal taxes. Thankfully, most states have their own portals or apps, available through their websites, to make payments even easier.
PTET
If your business operates across states, it’s helpful to be aware of the Pass-Through Entity Tax (PTET). This is designed for pass-through entities, in order to bypass the State and Local Tax (SALT) deduction limit cap of $10,000. Basically, it allows qualifying businesses to pay state tax, rather than having their owners or shareholders pay these taxes.
Some states allow you to elect to pay PTET, while in others, it is mandatory.
How to pay PTET
Paying PTET for your corporate taxes can be tricky. But by following the steps below, you’ll be able to navigate the process with ease:
- Confirm your eligibility. Your business must be a pass-through entity, and the state in which you operate must offer the election.
- Make the election. In most states, this needs to be done online, annually, through the state tax portal. Generally, you need to make the election by March 15 of the current tax year.
- Calculate your estimated liability. To work out your estimated payments, you’ll need to research your state formulas. Some jurisdictions base estimates on 100% of the previous year’s PTET, or 90% of the current year’s estimate. Chat with your accountant or tax pro about how to make the correct calculations for your state.
- Make the quarterly payments. Double-check your state’s quarterly deadlines, and ensure you make your payments before these cut-off dates.
- File your return. At the end of the tax year, finalize any remaining money due, and file your return by March 15 of the following year.
- Claim the PTET credit on your personal return. If you’re a shareholder, partner, or member of a pass-through entity, you’ll be able to claim a SALT cap workaround credit on your personal state income tax return, for your share of the PTET. Make sure you complete the right forms and schedules to do so. Also, remember to keep track of your payment receipts for your records.
Note that a tax expert can help you navigate PTET payments for different states, to ensure your business can make the most of potential benefits, and stay compliant.
Common mistakes and how to avoid them
Like with any corporate taxes, it is possible to make errors on your PTET returns. Be mindful of common errors, so you know what not to do.
For example, being eligible for PTET isn’t enough. You must also clearly communicate this with all partners and shareholders, and ensure everyone knows exactly what’s expected of them. Also pay attention to the deadlines for electing and paying PTET, especially if you’re in a state that requires an annual election. Also, calculate what you need to pay accurately. This may mean you’ll need to get professional assistance.
For help navigating corporate taxes, and putting more money back in your pocket, schedule a Discovery Call with one of our CPAs today!
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