The Basics of Taxation on Business

When you own a business, you’re taxed differently than individuals. You’re not just responsible for paying business income tax; you may also have to pay employment taxes, among other types of taxes.

Understanding how taxation on businesses works is a key part of running a successful company.

If you recently launched your business or you’re planning on starting a business, use this guide as an introduction to your obligations and ensure you’re properly prepared when it comes time to file.

What taxes are businesses responsible for?

Your tax responsibilities as a business owner can vary depending on whether you have employees and how you operate your business. Some taxes may not apply to your business at the moment, but it’s important to understand the types of  tax responsibilities that businesses may face, including:

Income tax

Businesses have to pay federal income tax just like individual taxpayers. Income tax makes up a significant portion of the business taxes you pay. Business income tax rates and applications vary depending on your entity’s organizational structure.

If you’re filing taxes for a partnership, each partner has to report their share of profits and losses on their individual tax return. You have to file Form 1065 in addition to your 1040, but you don’t have to pay income taxes as a business.

S-corps are also pass-through entities, which means profits and losses are passed through to shareholders. Shareholders pay their individual income and applicable tax rates. You file Form 1120-S for an S-corp.

C-corps are taxed at the 21% corporate tax rate, but shareholders are subject to double taxation. The corporation is taxed as an entity when profits are earned, as well as when earnings are passed onto shareholders through dividends.

In addition, each shareholder is responsible for reporting profits and paying tax on their individual tax return. You file Form 1120 for a C-corp.

Sole proprietorships are taxed at your individual income tax rate, but you do have to file Schedule C in addition to your 1040. You also have to pay self-employment tax, which we’ll cover later in this section.

Employment tax

If your business has employees, you have to pay employment taxes, also known as payroll taxes. These include both taxes withheld from employees’ paychecks and those the employer is responsible for paying. 

The taxes withheld from an employee’s paycheck are federal income tax, state income tax, and their portion of Social Security and Medicare tax. The employee Social Security tax rate is 6.2%, and the Medicare tax rate is 1.45%. 

The taxes that employers are responsible for paying are federal and state unemployment taxes, as well as the employer portion of Social Security and Medicare tax. Although most businesses have to pay federal unemployment (FUTA) taxes, you may be eligible for a FUTA tax credit if you’ve already paid into a state unemployment fund.

Your employees need to complete Form W-4, which will be used to determine how much federal income tax to withhold. Depending on their tax liability at the end of the year, employees will either receive a refund for any excess taxes withheld or have additional taxes owed.

Sales tax

Businesses that are in certain regions have to pay state and local sales tax. While there’s no federal sales tax in the US, most states have sales tax. If you’re in one of those states, you have to pay sales tax.

If you sell products to customers in a state with sales tax, you’re responsible for collecting, reporting, and paying the sales tax.

Some businesses are also required to pay excise taxes or sales taxes on particular products. Examples of excise taxes include:

• Environmental taxes
• Fuel taxes
• Communications and air transportation taxes
• Tax on the first sale of heavy trucks, trailers, and tractors
• Wagering taxes

Speaking to a tax professional can help you get more clarity on which taxes you have to pay and how to file excise taxes.

Self-employment taxes

Normally, employers pay half of your Social Security and Medicare taxes. However, if you’re self-employed, you are responsible for both portions. The IRS allows you to deduct the employer portion on your tax return.

Estimated taxes

Any partner, shareholder, or sole proprietor who expects to owe at least $1,000 in taxes usually has to pay quarterly estimated taxes. Corporations usually have to pay estimated taxes if they expect to owe at least $500.

You can use Form 1040-ES to file and pay estimated taxes. To calculate your estimated tax payments, you’ll need to have your adjusted gross income, taxable income, taxes, deductions, and credits for that year.

Personal property taxes

Most states have some form of business personal property taxes. If you use personal property like equipment and machinery for business purposes, you may have to report and pay personal property taxes.

Check with your state, city, or other local jurisdiction for their requirements.

There are several states that don’t collect personal property taxes, and your business may be exempt if you meet certain criteria. 

This might seem like quite a bit to keep track of. To help you stay organized, you may want to use a business tax checklist for what you’ll need to file.

Filing deadlines and requirements

Take note of the following federal deadlines that may apply to your business:

• March 1: Farmers and fishers must file a tax return and pay income taxes if they didn’t make all estimated tax payments
• March 15: If you operate on calendar years, S-corp and partnership returns are due
• April 15: Individual tax returns and quarterly estimated taxes are due. This is also the corporation tax deadline
• April 30: Quarterly FUTA taxes are due
• June 15: Estimated quarterly tax payments are due
• July 31: Quarterly FUTA taxes are due
• September 15: Estimated quarterly tax payments are due. Tax extension deadline for partnerships, multi-member LLCs, and S-corps who file a calendar-year return
• October 15: C-corps and sole proprietorship tax extension deadline
• October 31: Quarterly FUTA taxes are due
• December 15: C-corps estimated quarterly tax payments are due
• January 15: Estimated quarterly taxes are due
• January 31: 1099-NEC must be filed, quarterly FUTA tax is due, and W-2 forms must be sent to employees

If any of these dates fall on a weekend or federal holiday, the applicable deadline is the following business day. 

While you can face penalties and fees for filing late, you can also request an extension to file in many cases. As long as you request an extension before the filing deadline, the IRS will generally grant your extension to file.

Keep in mind that requesting an extension to file your tax return doesn’t give you an extension to pay your taxes. If you don’t pay your taxes by the deadline, you may still face penalties and fees.

To keep your business in good standing, keep track of which deadlines apply to you.

Minimize your tax bill with deductions and credits

If you’re paying business taxes for the first time, you might be surprised by the amount of tax you’re responsible for. Fortunately, you can deduct business expenses and claim credits to offset taxation on businesses and lower your overall tax bill.

Some examples of common deductions and credits for businesses include:

Clean vehicle credits

The IRS offers clean vehicle tax credits for the purchase of some electric vehicles (EVs) and fuel cell vehicles (FCVs). Even if you’re planning to buy a new clean vehicle in the future, you may qualify for the credit. 

In addition to vehicles, you may also be able to write off expenses related to EV charging equipment.

Fuel Tax Credit

If you use fuel for a specific work-related activity, you may qualify for the Fuel Tax Credit. The Fuel Tax Credit doesn’t apply to vehicles used for personal use or commuting, non-business, off-highway use, or use of vehicles that aren’t registered to drive on public roads.

You may qualify if your business uses gasoline for aviation, commercial fishing, or to power equipment for a landscaping business.

Home office deduction

If you use a portion of your home regularly and exclusively for business purposes, you can write off the square footage of that area. To qualify for the home office deduction, you can’t use that part of your home for any non-business purposes.

Standard mileage deduction

Businesses and self-employed individuals can use the standard mileage deduction to deduct vehicle-related expenses. If you’re self-employed or own a business, you can deduct 70 cents per mile (2025 rate).

If you use your vehicle for personal and business use, you’ll need to figure out what percentage of miles were driven for business purposes before claiming this deduction.

Avoiding common business tax mistakes

Learning the ins and outs of taxation on businesses can be tough, but you can make your life easier by avoiding some common mistakes.

Start by making sure you’re keeping records and separating business and personal expenses. When it’s time to file, you’ll be better prepared to claim deductions for business-related expenses, and you’ll have the necessary documentation should the IRS require it.

It’s also important to make sure you’re filing your taxes on time. A mid-year check-in can help you stay on track to file and pay your taxes on time.

If you don’t pay enough estimated quarterly taxes, you‘ll likely owe when you file your business tax return. Working with a tax professional can help you accurately calculate and pay your estimated taxes to avoid penalties.