Taxation is one way that governments can raise revenue. The regulations impose charges on corporate entities and the citizens so that it can be able to finance all their expenditures. States uses taxation to encourage certain economic decisions and also to discourage them.
The revenue is used to service various activities and institutions such as public schools, public hospitals, military service and infrastructure.
Small businesses play a critical role in taxation.
Taxes are different depending on federal, state and local. They are also charged differently according to the type of the business such as being self-employed, making a profit, having employees and if you are selling taxable products. If you are planning to start a business, it is essential to know the type of taxes you are required to pay and how high rates of taxation have impacted on small businesses.
Types of Taxes that Small Business Must Pay
• Sales Tax
Sales tax is collected and paid to the revenue department of the relevant state. It is usually charged on specific products and services. The money is raised and spent and all reports completed on a daily basis.
• Self –Employment Tax
Sole-proprietors pay these kinds of taxes. Owners of those corporations that work as employees will not need to pay self-employment tax.
• Business Income Taxes
make sure this is done the proper wayAll type of companies should pay tax on their income; this is the revenue from the firm after the expenses have been deducted.
• Excise Taxes
These are taxes that are paid by a business for different uses or consumption such as activities like transportation, communication and fuels. The fees are paid to the IRS. It can be either annually or quarterly depending on the usage.
• Employment Taxes
Employment taxes are usually paid by the owners of the business for different types of taxes depending on the employees’ gross profit.
Impacts of a High tax rate on Small Companies
• Tax as another expense
The main aim of every business is to maximise their profit. The profit is the controlling factor on whether the business will continue. And so, because of a high tax on services and goods, it has become another expense. Tax is compared to the raise of cost of electricity bills and commodities. Paying various taxes can make a small organisation run into losses.
• Economy Growth
When the economy of the state is good, the business is affected positively. Citizens of the state can spend, and mostly they spend on buying products and services. Through taxation, the government has been able to service many activities such as security which has helped the businesses to grow since there no cases of insecurity. When people feel secure, they become productive.
Taxation has caused small companies achieve a high target profit because they are aware of the fact that they will need to pay taxes on their earnings. Due to the high rate of taxes, the organisations always looks for ways to maximise their profits so that they do not to suffer losses after paying taxes.
• Level of Employment
Due to the high rate of taxation, small businesses find it difficult to maintain many employees. They find it challenging paying salaries because of high rate taxes imposed on them. It has caused some people to be retrenched, and this has added to the level of unemployment.
The high rate of taxation has affected the small organisations negatively. When products are imposed with high tax, the price of goods and services goes up. When the price of commodities is high, then the demand of the goods goes down thus leading to decrease in sales. Thus means that the company will not make a lot of profits.
Because of the high rate of taxation on small organisations, it has become hard for them to invest in other areas. For example, when an organisation is charged with high tax from their profits they might find it difficult to invest in many other businesses since a large part of the profit will be used in paying taxes and other necessities.