Natalie is a teacher and holds an MA in English Education and is in progress on her PhD in psychology.
Taxes are a certainty, for businesses as well as for individuals. In this lesson, we'll examine accounting principles for three common taxes that businesses encounter: sales tax, property tax, and income tax.
They say the only things that are guaranteed in life are death and taxes. Leslie knows that - she owns her own business, a small flower shop, and it seems like she's always paying taxes! Taxes are a required payment to the government. Individuals, like Leslie or you or me, have to pay certain taxes every year, but so do businesses like Leslie's flower shop. The taxes a business pays partly depends on where it is located and partly depends on what type of business it is. Let's look at how Leslie can account for three common taxes businesses face: sales tax, income tax, and property tax.
Have you ever gone to the store to buy something that was $20, but when the clerk rang it up, it was more than that, like $21.50? The extra money that you had to pay was a sales tax, or a tax levied by the government on things that are purchased. In the United States, sales taxes vary from state to state, but the business is always responsible for collecting sales tax and passing it on to the government.
In Leslie's state, the sales tax is 7% on every purchase. So, let's say that a man comes in to the store and buys $100 worth of flowers for his girlfriend. He would actually have to pay $107: $100 for the flowers and $7 in sales tax. That's pretty simple from his point of view. But, how does Leslie record the sales tax? In her books, Leslie will want to record $100 as a sale and then $7 as a liability. In this case, Leslie will be a holding agent for the state, and when she collects that $7 in sales taxes, it creates a liability (something she owes) to the state government.
Every April, Leslie gets stressed out because she has to fill out her tax form and pay her taxes. Just like you and me, Leslie's business owes income tax, or a tax levied by the government on the money earned in the previous year. Depending on what type of business it is, income tax varies, but most businesses (including Leslie's) owe income tax to the federal government, the state government, and sometimes to the municipal (or city) government. That's a lot of tax!
Taxes for businesses are slightly different from taxes for employees. An employee has a certain amount withheld from their paycheck every time they get paid, which then goes to the government, but businesses have to file estimated taxes, or taxes paid during the year that are an estimate of the total tax bill for the year. Estimated taxes have to be paid four times a year.
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How can Leslie do this? Let's look at an example. At the beginning of April, Leslie will want to see what her business has earned in January, February, and March. From there, she'll have to estimate what her taxes will be, and then pay the estimated taxes. She'll do this three other times during the year, and then the following April, she'll calculate her actual tax owed based on what the business earned. If it's more than what she's paid, she'll have to pay the difference. If it's less than what she's paid, the business will get a refund.
Leslie gets that her flower store has to pay sales tax and income tax. But, does she also owe money for the building where her flower shop is located? If a business owns real estate, such as a building, warehouse, or land, the business almost always owes property tax, or a tax levied by a municipality and/or state based on the value of real estate. Property taxes are charged on all types of real estate, including personal homes. For example, Leslie owns the house she lives in, and so she has to pay property taxes every year on that.
Property taxes for businesses are similar. If a piece of real estate is owned by a business, like the building where Leslie's shop is, then the business has to pay property taxes every year. The way property taxes are assessed, as well as the amount, varies by location. Some states and cities charge property taxes quarterly, some once a year. Leslie will want to do research to find out how her state and municipality charges taxes.
Taxes are a required payment to the government. Among other taxes, businesses have to deal with sales taxes, income taxes, and property taxes. A sales tax is a tax levied by the government on things that are purchased. Businesses should collect the sales tax from customers when they purchase goods and record it as a liability in the business accounts.
Businesses also have to pay income tax, or a tax levied by the government on the money earned in the previous year. Four times a year, businesses have to pay estimated taxes, or taxes paid during the year that are an estimate of the total income tax bill for that year.
Finally, if the business owns any real estate, it will owe a property tax, or a tax levied by a municipality and/or state based on the value of real estate. Property taxes vary according to state and municipality, so business owners should check the law where they live.
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