Savvy business owners know the importance of a well thought out business plan prior to starting their venture. One specific area to carefully plan for: tax obligations.

Business owners: Prepare for these four tax bills

Business owners are generally responsible for these four types of federal taxes:

  • Income taxes. The Internal Revenue Service (IRS) will expect this tax to come directly out of the business’ profit. The chosen business structure will impact the income tax bill. Common examples include a sole proprietorship, partnership (which can be an LLC, a general partnership or a limited partnership), or a corporation (subchapter S or C).  
  • Employment taxes. This refers to the portions taken out for Medicare and Social Security contributions for the entity’s employees. The chosen business structure will also impact the amount needed for employment taxes.
  • Self-employment taxes. Business owners may need to pay the IRS for the Medicare and Social Security contributions if they work for the business.
  • Excise taxes. Excise taxes are special taxes used for certain types of products or services. A common example includes additional taxes on the sale of alcohol. This tax is typically not impacted by the chosen business structure.

A failure to take these into consideration when choosing your business structure can result in surprise tax bills from the Internal Revenue Service. It is also important to note this piece touches only on federal tax obligations, state and local taxes will also apply.

Business owners can take steps to mitigate their tax bills. An attorney experienced in business law and tax planning matters can review your plan and help better ensure you choose the right business structure for your endeavor.