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Taxes are a nearly unavoidable part of life, especially for business owners. Even in states that don’t require personal income taxes, many cities and counties in those states require tax registration as a form of licensing. States, cities and counties also have a variety of special local taxes that you need to be aware of when you start a business. From a 1% tax on services in Jackson, MS to Transit Self-employment taxes in a group of cities and counties in Oregon, it is a good idea to know about federal, state and local taxes, prepare for them and pay them in full.
I know from bitter experience how ignorance about taxes can trip a new business owner up. I was pretty clueless about taxes when I started my first business. I failed to hold sales tax and save for business tax. When tax time rolled around, I got an eye-popping tax bill for hundreds of dollars. I had no idea how to pay that amount.
I ended up calling the state tax agency and making payment arrangements. Since I was paying late, even more money was added to the tax bill in the form of penalties and interest. I even took a hit on my credit report over that tax bill. That painful lesson taught me to think of tax money as separate from my earned business income and to prepare for taxes on a weekly basis.
Types of Business Taxes
There are a wide variety of business-related taxes at the federal, state and local levels. In some states, like Alaska, there are almost no business taxes collected by the state, counties or towns. Other states, like Ohio tax businesses several different ways, plus there are taxes to the county and town that must be paid.
Common Taxes for self-employed house cleaners, who operate as sole proprietors and general partners, include:
Sales Tax is a tax on customers. House cleaning businesses collect sales tax, hold it for the state and send the tax amount to the state every quarter (three months) or once a year. It is important to hold sales tax and keep sales tax separate from other payments collected from customers. Set up a special tax savings account at your bank or credit union. Transfer sales tax into that account at the end of each week. While it may be tempting to use collected sales tax for your business or personal expenses, don’t do it! That money belongs to the state, you are just holding it until tax filing time. Failure to pay sales taxes can have severe consequences, including fines, penalties and interest.
States Where House Cleaners Collect Sales Tax
House cleaning businesses are required to pay use taxes on goods they purchased without paying sales tax. Use tax comes into play when a business owner orders equipment or supplies online or through the mail from out of state and the seller does not charge sales tax for the goods. Use tax is also due when a business owner buys items wholesale, pays no sales tax and uses the items for the business.
For example, a cleaning business buys fifty (50) microfiber cloths wholesale to sell to customers. The business sells thirty-five (35) cloths and uses the remaining fifteen (15) for cleaning customer homes. The business owes use tax on the fifteen (15) cloths used for business purposes.
Since use tax has to be declared on your state tax form, some businesses “forget” to list items that should trigger use tax. The problem with “forgetting” is if your business is ever audited by the state tax agency, painful reminders in the form of penalties and interest may jog your memory for months or years to come. Declare your purchases that require use tax and avoid tax drama.
State Taxes on Business Income
Sole proprietors and general partners generally pay taxes on the business income they earn through individual state income tax returns filed once a year. Eight states have no income tax:
Be aware there are still various statewide business taxes in those some of those states. For example, Washington State taxes business income through the Business and Occupation (B&O) tax. In other states, businesses have to reach a certain amount of sales before they are required to pay business taxes. In Nevada, a business has to have gross revenue of four million dollars before they are required to file a commerce tax return. In addition, counties and cities in no income tax states collect a variety of local taxes and fees.
Federal Partnership Tax
In many states, any general partnership that files Federal Partnership Taxes – Form 1065 must also file some form of partnership return. In some states, partnership returns are information returns only. With information returns, no payment is required. In other states, payment is expected. Get more information from a Certified Public Accountant (CPA) or qualified tax preparer to find out if your partnership must file those returns and whether any tax is due.
Special State Taxes For Partnerships:
Delaware: General partnerships are required to pay a flat annual tax of $250 to the state.
Georgia: General Partnerships are required to file an annual state tax return known as the Georgia Income Tax Return Form 700
Illinois: Partnerships are required to pay the the state’s personal property replacement tax at a rate of 1.5% of net income.
Kansas: Each general partner is must pay state income taxes based on their percentage of ownership
Maryland: Partnerships are required to pay tax on income earned by partners who live out of state
Oregon: Partnerships pay an annual Partnership Minimum Tax of $150.00
Vermont: Partnerships pay a Business Entity Tax of $250.00 minimum or a percentage of annual income
Federal Self-Employment tax covers payments into Social Security and Medicare. Workers employed by other companies generally pay half of these taxes and their employers pay the other half. Self-employed persons must pay the entire amount. With the federal government, self-employment tax kicks in at $400 or more of money earned as a self-employed worker. The federal self-employment tax rate is 12.4% for Social Security and 2.9% for Medicare taxes (15.3% total).
Most states require sole proprietors and general partners to pay estimated self-employment income taxes. State self-employment tax is often paid quarterly, similar to the way self-employment taxes are paid to the federal government.
State self-employment tax is a quarterly prepayment of state income tax. Many states will issue payment vouchers (like the one shown below) that must be used every few months to pay a portion of the state income tax.
If you fail to pay any state estimated tax, don’t pay enough estimated tax or pay late, penalties, fees and interest could result. Your accountant or qualified tax preparer can help you with state estimated income tax in your state.
States With No Self-Employment Tax
Nearly every county in which your business operates will tax your business in some way. In some states, county tax is bundled with state tax, so you pay both at the same time. In other states, counties collect business tax on their own once a year. Your county clerk’s office can give you more information about county taxes and when they are due.
Many cities require tax registration as a form of licensing. In addition, many cities and towns collect sales and business tax. Your city or town clerk’s office can give you more information about city/town taxes and when they are due.
Employment Tax And Withholding
In all US states, employers must withhold federal, state, and payroll taxes from employees’ wages. Get more information about employment tax and withholding by contacting your state tax agency or your accountant.
Get A Handle On Your Taxes
Taxes are not the fun or exciting part of starting your new business, but it is important you understand them. Since you must deal with federal, state and local taxes on your cleaning business, it is a good idea to get the information you need. What I learned from my first business tax fiasco years ago is that preparation is key to handling your taxes. Without preparation, it is easy to lose track of your taxes. Without preparation, you could fall into the trap of thinking of tax money as just part of your earnings, frittering it away and then scrambling at tax time to come up with the money for your tax bill.
First, learn about the taxes due in your state, county and town. Every state, county and city has online resources that explain which taxes are collected locally. Some states, like North Carolina, have excellent tax specialists just a phone call away. In addition, many state tax agencies hold in-person tax seminars in cities and large towns. Ask questions about local taxes at your county or city clerk’s office.
The US Small Business Administration (SBA) manages a national network of Small Business Development Centers (SBDC) that provide free or low cost help with all parts of starting your business, including taxes. Find a SBDC near you.
Another, more expensive option is to pay your accountant for one hour or more of his or her time and ask questions about federal, state and local taxes. Spend at least half of that time with your accountant learning more about federal estimated self-employment taxes.
Then move on to practical tax preparation. Set aside business tax and self-employment taxes on a weekly basis. Organize your paper business receipts in a check folder or envelopes by month.
If you are more comfortable online, use accounting software to keep track of your expenses and taxes. Use your phone to take photos of all your receipts or scan them daily. File the digital records on your computer or a thumb drive (also known as a USB drive) for safe storage.
Create a bank or credit union account to hold your tax funds and transfer your tax funds into that account every single week. When your tax bill arrives, pay your taxes on time and in full.
Finally, breathe a sigh of relief…until the next tax payment is due.
Just Getting Started?
- Apply for a business name
- Get a business license
- Register to pay taxes
Just click on the map to find your state and get started.
Are business taxes scary for you? How have you learned to deal with taxes? Share your business tax learning curve in the comments below. ⬇︎