Tax liabilities include the amount of money that your business owes to various tax authorities. These tax liabilities need to be paid within a year, and the liability itself will depend on the legal structure of your business.
Understanding Tax Liability
Types of Tax Liability
Business tax liability is the amount of taxes you owe based on your current business income. If your business is a sole proprietorship, partnership, S corporation, or LLC, you will use pass-through taxation. That means any profits that your business makes will be taxed on your personal tax return. If you qualify as one of these types of businesses, calculate your taxes quarterly based on your yearly income. This way, you can make quarterly payments to the IRS and avoid a large tax bill at the end of the fiscal year.
If your business qualifies as a C corporation, you’ll be taxed at the federal corporate tax rate along with your state tax rate.
Calculating Taxes
If you’re not sure how to calculate your taxes, follow these steps:
Estimate your business income for the year.
The best way to do this is to calculate your business income for the current quarter and use that as your basis for a yearly calculation. Estimate deductible business expenses for the year. Use the same method as you would for calculating income. Start with a quarter’s calculations, then go from there.
Estimate taxable income.
After you’ve calculated your yearly pretax income and your deductible expenses, subtract the deductible expenses from the pretax income to come to your estimated taxable income. Make sure to include the tax credits you may be eligible for during this step.
The IRS uses a graduated tax rate, which means you’ll be taxed at different rates depending on your income level. That’s why it’s important to carry out these calculations each year.
Divide that number into quarters.
Divide your taxable income by four in order to achieve your estimated tax payments for each quarter.
If your business operates close to margin, you might end up with no tax liability at all.
