Tax Revelation for Small Business Operators

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The Reality of Doing Business

Business is both art and science. Art in the sense that you strive to create and operate a business that solves real problems in the lives of others and minimize their pain points. Science in that there are some technical tasks that you must take care of or else run the risk of business failure. One of those technical tasks is taxes.

Most of us are motivated to join the ranks of small business for the following reasons:

  • Lack of Employment Opportunities
  • Desire to Be Own Boss
  • Adventure and Fulfillment in Life

These reasons are great and admirable, but they fail to prepare you adequately to know what to expect. Most of the lessons that are learned about business can only be taught by experience. The hope is that these experiences are not terminal or too heavy in terms of setbacks for the aspiring business owner. If you live in the US, then one of the very real experiences of being in business is the payment of local, state, and federal taxes.

Types of Small Business Taxes

The following list highlights some ways that small businesses are taxed:

  • income tax
  • personal property tax
  • business tax
  • franchise and excise tax
  • real property tax
  • sales tax

These taxes are administered by the governing authorities to ensure compliance and ultimately payment. When you go to obtain your business license and / or permit, the last thing on your mind is what taxes you might owe and how you’re going to pay them. Primarily, you’re concerned about making your business successful and generating profits. One of the greatest lessons that you can and will learn about doing business in the US is that you are working not only for yourself, but for the governing authorities also. This is not a bad thing though. In operating a business, you have the privilege to work as much as you want and to earn as much as possible with minimal oversight from the government as long as you comply with certain regulations and laws of the industry you work in. However, you are responsible for paying any and all taxes that your business is responsible for. The main small business tax is the income tax.

Small Business Income Tax

The best way to understand the small business income tax is to think in terms of not only working for yourself, but also working to pay taxes. To keep things simple, let’s say that you make a sale for $5. In order to make this sale, you spent a total of $2.50 (includes variable and fixed costs), and are left with a profit of $2.50. Now, you are responsible to the taxing authorities to pay tax on the $2.50. Also, you may owe tax on the $5 sale depending on the type of business you’re in. What’s the key lesson from this example? It’s simple, but powerful once you truly understand. Not only are you in business to earn money for yourself and build wealth, but you’re responsible to pay taxes on all you earn. Not a bad thing once you understand that’s just the way the game of business is operated in the US, and it’s a part of the price of being a US citizen and living in the world’s greatest economy.

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