The U.S. tax system is highly complex. This is largely due to the numerous types of taxes at the federal, state, and local levels, each with its own rules and reg­u­la­tions. On top of that, there are countless laws and guide­lines that determine who has to pay taxes, on what, and in what amount. For example, employees are subject to different tax oblig­a­tions than business owners. This overview provides insight into the different types of taxes in the U.S. and which ones are par­tic­u­lar­ly relevant for busi­ness­es.

The main types of taxes for busi­ness­es

In the U.S., busi­ness­es typically follow either cash basis ac­count­ing or accrual basis ac­count­ing for tax reporting. These methods track all operating income and expenses that the IRS and state tax au­thor­i­ties need to determine whether a company is paying the correct amount of taxes. Here’s a list of the types of taxes:

Federal taxes (apply to most busi­ness­es):

  • Income tax – Paid by cor­po­ra­tions and passed through to owners in other business struc­tures.
  • Em­ploy­ment tax – Covers Social Security, Medicare, and Un­em­ploy­ment Taxes (for employees and employers).
  • Self-em­ploy­ment tax – Covers Social Security and Medicare for self-employed in­di­vid­u­als.
  • Excise tax – Applies to specific goods and services (e.g., fuel, alcohol, tobacco).

State & local taxes (varies by state):

  • Sales & Use tax – Charged on certain goods/services; not all states have this tax.
  • Property tax – Paid by busi­ness­es that own real estate.
  • Franchise tax – Charged in some states (e.g., Texas, Delaware) for the privilege of operating.
  • Gross receipts tax – Levied in certain states instead of income tax.

Ad­di­tion­al tax con­sid­er­a­tions:

  • Estimated tax – Required for busi­ness­es and self-employed in­di­vid­u­als expected to owe $1,000+ in taxes.
  • Al­ter­na­tive minimum tax (AMT) – Applies to some cor­po­ra­tions.

Un­der­stand­ing these tax oblig­a­tions is crucial for busi­ness­es to ensure com­pli­ance and avoid penalties.

What types of taxes are there? A detailed ex­pla­na­tion

Income tax

All busi­ness­es, except part­ner­ships, must file and pay taxes on any income earned or received during the year. C-cor­po­ra­tions (C-corps) pay corporate income tax on their profits, while pass-through entities (such as sole pro­pri­etor­ships, S-cor­po­ra­tions, and LLCs) report business income on the owners’ personal tax returns. Most states impose a corporate income tax, but rates and struc­tures vary widely—some states have no corporate income tax but instead impose a gross receipts tax or franchise tax. You can find the latest corporate income tax rates in this State Corporate Income Tax Report by the Tax Foun­da­tion. Part­ner­ships do not pay corporate income tax directly but must file an annual in­for­ma­tion return (Form 1065) to report income, gains, and losses, which are then passed through to the in­di­vid­ual partners, who report them on their personal tax returns. S-cor­po­ra­tions and LLCs also function as pass-through entities, meaning they typically do not pay corporate income tax at the entity level.

Em­ploy­ment tax

If you have employees, you must comply with federal and state tax re­quire­ments for payroll taxes and reporting. Employers must withhold federal income tax, Social Security tax, and Medicare tax from employees’ wages and pay their own share of Social Security and Medicare taxes under the Federal Insurance Con­tri­bu­tions Act (FICA). Ad­di­tion­al­ly, employers are re­spon­si­ble for paying the Federal Un­em­ploy­ment Tax (FUTA) and state un­em­ploy­ment taxes (SUTA/SUI, varies by state). Most states also require busi­ness­es to provide workers’ com­pen­sa­tion insurance, and some impose ad­di­tion­al payroll taxes, such as dis­abil­i­ty or family leave con­tri­bu­tions. Employers must report wages and with­hold­ings using Form 941 (quarterly) or Form 944 (annually) and provide employees with Form W-2 for tax reporting.

Self-em­ploy­ment tax

If you are self-employed, you are re­spon­si­ble for paying Social Security and Medicare taxes to remain covered under the Social Security system. Unlike tra­di­tion­al employees, who share these costs with their employer, self-employed in­di­vid­u­als must cover both the employer and employee portions, totaling 15.3% of net earnings (12.4% for Social Security and 2.9% for Medicare).

Self-em­ploy­ment tax is based on net income, meaning you can deduct eligible business expenses—such as ad­ver­tis­ing, office supplies, equipment, and travel—to reduce your taxable income. Ad­di­tion­al­ly, you can deduct 50% of your self-em­ploy­ment tax when cal­cu­lat­ing your adjusted gross income (AGI), helping to lower your overall tax liability. For more details, refer to the IRS Self-Em­ploy­ment Tax Guide.

Excise tax

Excise tax is a specific tax on certain goods, services, and ac­tiv­i­ties rather than general income or sales. While often called a “sin tax” when applied to products like tobacco, alcohol, and gasoline, it also applies to in­dus­tries such as air trans­porta­tion, heavy trucks, indoor tanning, and firearms. Busi­ness­es that man­u­fac­ture, sell, or use excise-taxed products must collect and remit the tax to federal and state au­thor­i­ties.

At the federal level, excise taxes are regulated by the IRS, while alcohol, tobacco, and firearms fall under the Alcohol and Tobacco Tax and Trade Bureau (TTB). Many states also impose ad­di­tion­al excise taxes, so busi­ness­es should review IRS guide­lines and state tax reg­u­la­tions to ensure com­pli­ance.

Sales and use tax

Sales tax is a state-imposed tax on the sale, lease, or rental of goods and certain services. However, tax laws vary by state, and some states exempt essential items like groceries, pre­scrip­tion med­ica­tions, and clothing from sales tax.

Use tax applies when goods are purchased from out-of-state sellers who do not collect sales tax. This ensures that states still receive tax revenue when taxable items are bought from a different state or online retailer. Busi­ness­es and in­di­vid­u­als are re­spon­si­ble for remitting use tax if sales tax was not collected at the time of purchase.

Currently, 45 states and Wash­ing­ton, D.C. impose a statewide sales tax, while five states (Alaska, Delaware, Montana, New Hampshire, and Oregon) do not have a general state sales tax. However, some local gov­ern­ments—such as those in Alaska—may still impose their own local sales taxes.

Property tax

Property tax laws vary widely across states, and not all states tax business property the same way. Some states impose property taxes only on real estate (such as com­mer­cial buildings and land), while others also tax business personal property (BPP), which includes equipment, machinery, furniture, IT assets, and vehicles used for business purposes. Tax rates and as­sess­ment methods depend on local ju­ris­dic­tions, and busi­ness­es may need to file annual property tax returns listing their taxable assets. To find detailed in­for­ma­tion on property taxes in your state, visit the State Gov­ern­ment Websites section of the IRS.

Franchise tax

Franchise tax is a state-imposed tax on busi­ness­es for the privilege of operating within a state, re­gard­less of prof­itabil­i­ty. It applies to certain busi­ness­es, including cor­po­ra­tions, part­ner­ships, and LLCs, depending on state laws.

The tax is cal­cu­lat­ed dif­fer­ent­ly across states—some base it on net worth, assets, or capital stock, while others use a fixed fee or revenue-based formula. Busi­ness­es may also owe franchise tax in multiple states if they have a physical presence or conduct business there.

For state-specific re­quire­ments, refer to the Fed­er­a­tion of Tax Ad­min­is­tra­tors (FTA).

Gross receipts tax

A gross receipts tax (GRT) is a state-imposed tax on a business’s total revenue, rather than on its profits. Unlike sales tax, which is collected from customers at the point of sale, GRT is paid directly by busi­ness­es, re­gard­less of whether they make a profit. Some states impose a gross receipts tax instead of a corporate income tax, while others levy it alongside other business taxes.

This tax is typically based on a business’s total revenue with little or no de­duc­tions for expenses such as wages, materials, or operating costs. As a result, busi­ness­es may owe tax even if they operate at a loss. Currently, states such as Delaware, Ohio, Nevada, Texas, and Wash­ing­ton impose some form of a gross receipts tax. However, rates and reg­u­la­tions vary by state, so busi­ness­es should review their state’s specific re­quire­ments.

Estimated tax

Estimated tax payments are required for in­di­vid­u­als and busi­ness­es that do not have enough taxes withheld through­out the year. This applies to self-employed in­di­vid­u­als, business owners, free­lancers, and those earning income from sources like interest, rent, dividends, or capital gains. If you expect to owe at least $1,000 in taxes after sub­tract­ing with­hold­ing and credits, the IRS requires you to make estimated payments quarterly.

Estimated tax payments cover more than just federal income tax—they also include self-em­ploy­ment tax (Social Security & Medicare) and al­ter­na­tive minimum tax (AMT), if ap­plic­a­ble. Busi­ness­es such as cor­po­ra­tions may also need to make estimated tax payments if they expect to owe $500 or more in federal taxes for the year. For details on due dates and payment methods, visit the IRS Estimated Tax Guide.

Al­ter­na­tive minimum tax

The Al­ter­na­tive Minimum Tax (AMT) is a parallel tax system that ensures high-income in­di­vid­u­als and certain cor­po­ra­tions pay a minimum amount of tax, re­gard­less of de­duc­tions or credits. Taxpayers must calculate their liability under both the regular tax system and AMT rules, paying the higher amount. The AMT primarily affects those with large de­duc­tions, but most middle-class taxpayers are exempt due to high income thresh­olds set by the Tax Cuts and Jobs Act (TCJA). While the corporate AMT was repealed in 2017, the Inflation Reduction Act of 2022 in­tro­duced a 15% corporate AMT for busi­ness­es with at least $1 billion in annual financial statement income.

What happens if a business does not file its taxes correctly?

Filing taxes ac­cu­rate­ly and on time is essential for busi­ness­es. Cor­po­ra­tions must file Form 1120 with the IRS, even if they have no taxable income, while other business struc­tures—such as sole pro­pri­etor­ships, part­ner­ships, and S-cor­po­ra­tions—file different tax forms based on their oblig­a­tions.

Failing to file a tax return on time can result in late-filing penalties. If a corporate tax return is filed more than 60 days late, the IRS imposes a minimum penalty of $485 (as of 2024) or the total unpaid tax, whichever is smaller. Ad­di­tion­al­ly, if unpaid taxes are dis­cov­ered, the business may face late-payment penalties, interest charges, and potential audits.

Busi­ness­es that do not file may also lose valuable tax benefits, such as the ability to claim a net operating loss (NOL) deduction, which requires timely reporting on Form 1120. To avoid penalties, busi­ness­es should ensure timely and accurate tax filings or request an extension using Form 7004 if ad­di­tion­al time is needed. The IRS Business Tax Penalties Guide has more details on the con­se­quences.

Please refer to the legal dis­claimer for this article.

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