I’m sure that one of your favorite topics is taxes (yeah right!). I’ll try to do this short, sweet and to the point. Taxes are like an onion – both have layers and make you cry. I think Shrek’s donkey said something like that. Well, whatever, let’s start with today’s blog post, taxes for entrepreneurs in a nutshell.
1st Layer – Federal Government
Your first contact with the federal government is when applying for the EIN through the IRS. The EIN is your business’ social security number and you will need it for almost everything, even opening a bank account. So don’t forget about it.
Federal taxation is primarily focused on taxing the profits (or income) of your business. The forms you will use depends on your chosen entity (LLC, C-Corp, etc). In addition, if you have employees you will have to pay the following federal taxes:
- Employees’ tax withholdings;
- Payroll taxes; and
- 50% of Medicare and Social Security taxes.
2nd Layer – State Government
Each state in the U.S. has its own set of tax laws. The general rule in Puerto Rico is that you have to pay income tax and sales tax. And no, it doesn’t matter if you have an e-Commerce business. Income taxes are subject to the P.R. Treasure Department’s tax bracket and are paid on April. Sales taxes ought to be collected when the good or service is sold (currently 10.5%).
Depending on your business, you could also be responsible for paying property taxes, among others. Make sure to consult your particular situation with a CPA or Tax Attorney. Believe me, you don’t want to stay up all night worried about whether you are complying or not.
3rd Layer – City or Municipality
Finally, cities or municipalities can also collect taxes, and in Puerto
GOOD NEWS AND CONCLUSION
In this blog post, we summarized the 3 layers of taxation: federal, state and city.
But wait, thanks to certain legislation, some business activities can be exempt from paying taxes; they are called incentive acts. To learn more about incentives, click here!
Taxes for Small Businesses, QuickStart Guide: Understanding Taxes For Your Sole Proprietorship, Startup, & LLC, ClydeBank Business Media (2016).