State vs. Federal Taxes: What Business Owners Need to Know

Running a business is a wild ride, right? You're juggling a million things, from making payroll to keeping customers happy. Taxes? They often end up on the back burner until way too late.

But here's the deal: understanding the difference between state taxes and federal taxes, diving into tax compliance, finding those juicy tax deductions, and figuring out multi-state filing requirements can save you a ton of headaches (and money!).

So, let's break down the essentials of small business taxes in plain English—Straight Talk CPAs style.

Federal Taxes: The Big Picture

Think of federal taxes as the foundation. They're what everyone in the U.S. has to deal with, regardless of where your business is located. The IRS is the main player here, collecting taxes that fund everything from national defense to infrastructure.

Key Federal Taxes for Businesses

• Income Tax: Based on your business profits. How you pay depends on your business structure (more on that later).
• Employment Taxes: If you have employees, you're responsible for withholding and paying Social Security, Medicare, and federal unemployment taxes.
• Excise Taxes: These apply to specific goods or services, like fuel or alcohol.



✔ Example: If you run a C-corp and had a taxable income of $100,000, you'll owe a flat corporate tax rate of 21%, which is $21,000 ($100,000 x 21%).

Business Structure and Taxes: Choosing Your Path

Your business structure has a huge impact on how you pay taxes. Here's a simplified breakdown:

• Sole Proprietorship: The simplest structure, where your business income is reported on your personal tax return.
• Partnership: Similar to a sole proprietorship, but with multiple owners. Profits and losses pass through to the partners' individual tax returns.
• Limited Liability Company (LLC): Offers liability protection and tax flexibility—can be taxed as a sole proprietorship, partnership, S corp, or C corp.
• S Corporation: A pass-through entity where profits and losses are reported on owners' individual tax returns with potential tax advantages.
• C Corporation: Taxed as a separate entity with its own corporate income tax rate. This can lead to "double taxation" (corporation pays taxes on profits, and shareholders pay taxes on dividends).



✔ Example: If you're deciding between an LLC and an S corp, an S corp allows you to pay yourself a "reasonable salary" and take the remaining profits as distributions, which aren't subject to self-employment tax. This can save you money, but it requires more administrative overhead.

Navigating Deductions: Keeping More of What You Earn

Deductions are your friend! They reduce your taxable income, which means you pay less in taxes. Both federal and state governments offer various business deductions.

Popular Deductions

✔ Pass-Through Deduction (QBI): Eligible small business owners can deduct up to 20% of their net business income.

✔ Depreciation: Deduct the cost of business assets over time.
✔ Section 179 Deduction: Allows you to deduct the full purchase price of certain assets in the year they’re placed in service.

✔ Research & Development (R&D) Tax Credit: If your side hustle involves innovation, software development, or product design, you may qualify for the R&D tax credit.

✔ Work Opportunity Tax Credit (WOTC): If you hire employees from targeted groups (such as veterans, long-term unemployed, or individuals receiving government assistance), you may qualify for a tax credit.

✔ Interest Deductions on Business Loans: If you take out a loan or use a business credit card for expenses, the interest on these debts may be deductible.

✔ Example: If you net $100,000 in income and take the 20% QBI deduction, your taxable income drops to $80,000. At a 25% tax rate, this saves you $5,000 in taxes!

Multi-State Filing: When Things Get Tricky

Doing business in multiple states? Get ready for extra complexity! You might need to file income tax returns in each state where you have a "nexus" (a significant presence).

Key Considerations

• Nexus: Understand what creates nexus in each state.
• Income Allocation: Determine how to allocate your income across multiple states.
• Sales Tax Collection: Collect and remit sales tax where required.
• Composite Returns: Some states allow businesses to file a single return on behalf of non-resident owners.



✔ Example: If you have employees working remotely in different states, you'll need to withhold and remit state income taxes in those states and comply with each state's payroll tax rules.

Staying Compliant: Avoiding Penalties

Compliance is key to avoiding penalties and keeping your business in good standing. This means:

✔ Keeping Accurate Records: Track all income and expenses carefully.
✔ Meeting Deadlines: Mark all tax deadlines on your calendar and file on time.
✔ Staying Updated: Tax laws are constantly changing—stay informed.
✔ Seeking Professional Advice: When in doubt, consult a tax professional.

Straight Talk CPAs: Your Tax Experts

Taxes can be confusing, but they don’t have to be overwhelming. By understanding the differences between state and federal taxes, and by staying organized and informed, you can navigate the tax landscape with confidence.

Straight Talk CPAs is here to help! Contact us today for a consultation, and let us take the stress out of taxes.