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How Small Business Taxes Work

Basic Business Taxes

Federal taxes on businesses, small or large, fall into four basic categories:

Income tax is levied on a business's taxable income, or net profit. To get to net profit, you take gross (total) profit, typically the money that comes in from sales of goods or services, and subtract business expenses (such as office supplies, rent or the purchase of a new company vehicle) [source: Nikolakopulos].

Employment taxes are taxes levied on wages. They include income tax (on the income of the person, not the company), Social Security and Medicare contributions, and federal unemployment tax. For Social Security and Medicare taxes, employers and employees split the cost, each paying half the amount due. In most cases, employment taxes are automatically withheld from paychecks as they're issued [source: IRS].

Self-employment tax is levied on business owners who do not pay themselves wages or do not withhold employment taxes from those wages as they go. Self-employment taxes cover Social Security and Medicare contributions; if owners want to set aside money in case of unemployment, they need to do it themselves [source: Entrepreneur]. Self-employment taxes cost twice as much as employment taxes since no one is splitting the cost [source: Dratch].

Excise tax applies to businesses operating in particular industries (with no apparent rhyme or reason) and includes special taxes on retail sales of goods like alcohol, tobacco, fuel and flu vaccines, as well as services like gambling, telecommunications and indoor tanning [source: IRS]. It also applies to manufacturer sales of goods like coal and fishing poles [source: IRS].

Excise tax is typically built into the price of a product or service. But for the rest of the categories, how much small businesses end up paying can vary quite a bit depending on how they're structured.