Starting a small business is a dream for many entrepreneurs. However, one of the most important things to consider is tax obligations. As a small business owner, you may wonder how much income you can make before you are required to pay taxes. The answer may surprise you. In this article, we will explore this topic in detail.
Before we dive into the details, let’s define what we mean by small business. The definition of a small business varies depending on the industry and location. Generally, a small business is a company that has fewer than 500 employees and generates less than $7.5 million in revenue annually.
Understanding Tax Obligations for Small Business
As a small business owner, you are required to pay federal, state, and local taxes. The amount of taxes you owe depends on your business structure, income, and expenses. Here are some of the taxes you may be required to pay:
- Income tax
- Self-employment tax
- Sales tax
- Employment taxes (Social Security and Medicare taxes)
The Internal Revenue Service (IRS) requires all businesses to file an annual tax return. The type of tax return you file depends on your business structure. For example, if you are a sole proprietor, you will file a Schedule C form with your personal tax return. If you have a partnership or corporation, you will file a separate tax return.
How Much Income Can You Make Without Paying Taxes?
The amount of income you can make without paying taxes depends on several factors. Here are some things to consider:
- Your business structure: Different business structures have different tax obligations. For example, if you are a sole proprietor, you will pay taxes on all of your business income. If you have a partnership or corporation, your tax obligations may be different.
- Your expenses: You can deduct business expenses from your income, which can lower your tax bill. However, you cannot deduct personal expenses.
- Your location: State and local tax laws vary. You may need to pay state income tax, sales tax, and other taxes depending on where your business is located.
Generally, if you are a sole proprietor, you can make up to $12,400 in 2020 before you are required to pay federal income tax. If you are married and filing jointly, you can make up to $24,800. However, you may still need to pay self-employment tax and state and local taxes.
Tips for Managing Your Small Business Taxes
Here are some tips for managing your small business taxes:
- Keep accurate records: Keep track of all of your income and expenses. This will make it easier to file your taxes and reduce your risk of being audited.
- Hire a tax professional: A tax professional can help you navigate the complex tax laws and ensure you are taking advantage of all available deductions.
- Set aside money for taxes: Don’t wait until tax season to start thinking about your tax bill. Set aside money throughout the year to ensure you can pay your taxes on time.
As a small business owner, it’s important to understand your tax obligations. The amount of income you can make without paying taxes depends on your business structure, expenses, and location. Keep accurate records, hire a tax professional, and set aside money for taxes to ensure you stay on top of your tax obligations.