Taxes and Shrimp Gumbo: A Guide to the Tax Menu

Small business owners may be responsible for several types of taxes—including federal, state, and local taxes—depending on their business structure, employees, industry, and location. This guide explains the most common tax obligations and how good bookkeeping can help you stay prepared.

Have you seen Forrest Gump?

Remember the scene where Bubba rattles off all the ways you can cook shrimp?

"Shrimp soup, shrimp stew, shrimp salad, shrimp and potatoes..."

The list seems to go on forever until Bubba finally concludes, "That’s about it."

That's exactly how many small business owners feel when they start learning about business taxes.

Federal taxes. State taxes. Sales taxes. Payroll taxes. Property taxes. Franchise taxes. Excise taxes. Before long, it feels like every time you turn around, there's another tax to pay, collect, report, or file.

Why are there so many taxes?

I can't answer that question without getting myself into trouble.

What I can tell you is that understanding the tax menu is part of owning a business. And while it may feel overwhelming at first, it becomes much easier once you know what you're dealing with.

Over the past 30 years of business ownership, these are the taxes I've encountered most often.

A Guide to Small Business Taxes

Federal Taxes

Federal income taxes are owed on your business income. Depending on your business structure—such as a sole proprietorship, partnership, limited liability company (LLC), or corporation—some or all of the tax may be paid by the business on its return, while some or all may pass through to the owner’s personal return. These taxes are generally due annually. The IRS (Internal Revenue Service) collects the tax and the required forms, which you may prepare yourself or have prepared by a tax professional.

Self-employment tax applies to earnings reported on your personal tax return from your business. If you are self-employed as a sole proprietor or own a single-member LLC, you generally owe self-employment tax on your business’s net earnings reported on Schedule C of your Form 1040. This tax covers your share of Medicare and Social Security and is currently about 15% of earnings. If you have employees, you also pay half of their Medicare and Social Security taxes each time you run payroll, while the employee pays the other half through deductions from gross pay.

Excise taxes are other federal taxes built into the cost of certain purchases, such as gasoline and airfare. Businesses and individuals alike pay these taxes as part of the purchase price. Most of us pay them without even realizing it.

State Taxes

State income tax may be owed annually, depending on where you live or do business. Most states impose a state income tax, but nine do not: South Dakota, Wyoming, Florida, Texas, Nevada, Alaska, New Hampshire, Washington, and Tennessee. These taxes are paid to the state or states where you conduct business, and the forms are usually filed when your federal return is prepared by you or your tax professional.

Sales tax is a state tax you may owe if you sell taxable goods or services. Most states have a sales tax, though a few do not, including Alaska, Delaware, Montana, New Hampshire, and Oregon. The state comptroller collects it. In general, you charge sales tax on each qualifying sale and remit the collected amount to the state, often monthly. While that sounds simple, sales tax can be one of the most confusing taxes to manage because rates often combine both state and local city components.

Unemployment tax is a state tax that helps fund benefits for workers who lose their jobs. If you have employees, you'll likely pay state unemployment tax. Rates vary by state and can change over time, so it's important to stay up to date on your state’s rates and filing requirements.

Franchise tax is imposed by some states on certain business entities for the privilege of doing business in those states. It is usually based on net worth, capital, or another measure defined by the state rather than on income. This is one of those taxes that surprises many business owners the first time they encounter it. Because rules and rates vary, it is important to understand the requirements in the states where you operate.

Local, County, and City Taxes

Property taxes are assessed on the value of real estate a business owns, and they can be a major expense for businesses that own property. Rates vary widely depending on location, and assessments can change over time.

Local income taxes are imposed by local governments in some areas on businesses operating within their jurisdiction. These taxes are usually a small percentage of income and are collected in addition to state and federal income taxes. Fortunately, these taxes are less common, but they're worth understanding if your business operates in multiple jurisdictions.

Hotel/motel taxes are collected by businesses in the hospitality industry for hotel occupancy or short-term lodging. These taxes are usually administered locally and can vary by city or county.

That's a Lot of Shrimp

So there you have it—the small business tax landscape can feel as long as Bubba’s list of shrimp dishes.

The good news is that once you understand your obligations, managing them becomes much more doable and helps keep your business running smoothly. Each tax has its own rules, but staying informed and getting professional help when needed can make the process far less overwhelming.

Keep an eye on changes in tax laws and regulations, since they can affect how your business operates. That’s all I have to say about that!

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Disclaimer: This article reflects my experience as a business owner and is provided for informational purposes only. It should not be considered tax, legal, or financial advice. Consult a qualified tax professional regarding your specific situation