For new business owners, setting up your own company can be a stressful time. There’s so much to think about and take into consideration, from ordering stock, getting new customers, there’s almost an unlimited number of tasks for you to complete.
Just to top it off, business owners also have the task of managing their own tax payments and using business tax resources, as doing this incorrectly could have significant repercussions. For such an important task, doing your taxes isn’t something everything is taught or knows what to do. Meaning for some, a simple mistake could easily happen.
In this article, we’ll be taking a look into business owners navigating taxes and what they can do to ensure they both get it right first time but also make it much easier to understand, what tips they can use and any different ways of working they can take on board to minimise risk.
Regardless of what your business does, every company has an obligation to ensure their tax responsibilities are completed and acted correctly. Each company has a number of different obligations they must adhere to which include, income tax, payroll tax, sales tax and, in some cases, depending on location, sector specific tax. Let’s take a look into each specific tax and what they mean to you.
Income tax
Income tax is essentially charged based on how much your company makes in net profit each annual year. If you’re a sole trader or partnership, you’d normally pay these through your personal tax returns. Partnerships are essentially the same except each party in the partnership will pay their own contribution to the tax amount.
Income tax is anything that the company essentially makes from the business. For example anything from sales revenue, service fees from clients, any allowances that are classed as income, things such as rent from a property you own or any business travel. Any of these can be classed as income tax so it’s important to ensure you include all of these when filing your returns.
Payroll tax
If you employ anyone, Payroll tax isn’t something you can avoid. For each party you employ, you’ll need to pay tax on payroll on their salary. This is the employer’s responsibility and can be done so in a number of ways however most companies will use payroll software to complete this.
All copies of employee’s payslips, hours worked tax deductions, and any other outside contributions need to be kept and supplied to ensure payroll tax is paid correctly.
Sales tax
Say you’re a car dealership, the second a customer purchases a vehicle, a percentage of that deal is taken off for sales tax. As in the name, essentially, it’s a tax for every sale the company completes. This tax is slightly different however as depending on your location and what is being sold, the tax amount may be reduced or even exempt. Since sales tax by state can vary significantly—with some states charging over 9% and others having no sales tax at all—it’s crucial to understand your local requirements.
If you feel your company will need to pay this, you’ll need to set up a sales tax account. Then, using the accounting software that will work this out to ensure you’re paying the correct amount for your company and sales completed.
For Incorporated businesses, they work differently to how sole traders pay tax, specifically based on the profits the company makes. Whilst it works similar to sole traders, the company as a whole must work out how much tax is due and pay this accordingly. The difference from sole traders is incorporated companies must provide detailed profits and losses financial statements to evidence their financial situation, ensuring companies aren’t trying to avoid paying more tax than is required.
Paying tax is an imperative part of running a business, and regardless of the size of your business, paying tax is something everyone has to do. That’s why it’s important to understand tax, how it works and how much you need to pay.
