Tax Basics

An Employer Identification Number (EIN) is a nine-digit number the IRS issues to business owners in order to file federal tax returns each year on their businesses’ net profits. Some states also issue a state tax id number if you live in a state that collects income tax. An EIN is also necessary to open a business bank account, apply for loans and business credit, and sometimes to get investor funding.

The most common small business state tax and local taxes you’ll see are income taxes and unemployment taxes. You may also pay property taxes, franchise taxes, excise taxes, and more. Check with a tax professional to make sure your tax liabilities are covered to avoid paying expensive penalties.

Typically, you pay sales tax on most goods and some services given to a customer or client in a state where your business has a physical presence. However, online businesses are also subject to paying state sales taxes on goods that are sold in states that implement a sales tax, even if the business’s physical location is in a state that doesn’t levy a sales tax.

State governments and the IRS may impose excise taxes on purchases of specific goods, including tobacco, alcohol, and fuel. These taxes are often baked in to the price of the final good or service. Excise taxes to cover the cost of a government-provided service. For example, excise taxes on fuel typically go to fund government maintenance and construction of new roads.

Small business owners, independent contractors, and freelancers all must pay self-employment taxes on business profits of $400 or above for the tax year. The self-employment tax rate is 15.3% and covers your social security and medicare contributions which would normally be withheld from your paycheck if you worked for someone else. You pay the self-employment tax on top of your regular income tax.