Types of Taxes You Should Know Before Starting a Business
When thinking about starting a business, the first thing that might come to mind is all the excitement and rewards. However, there are certain taxes you should be aware of beforehand. If you're thinking about starting your own business but you're not sure how this will affect your life financially, experts advise taking a look at these seven taxes:
Value-added tax (VAT)
Every business should always register for VAT because it's becoming a global norm to get revenue from taxation, no matter the size or location. When customers make purchases, this value-added tax could be included in the price of an item you offer, and you will need to pay the government its portion of the sale before doing anything else with that money. You want to know about VAT because your government might already have laws around revenue collection that may require compliance before the end product/service is sold to customers.
If your business makes more than $400 per year (different rules apply for what constitutes income), you need to register for Income Tax based on the amount of money. Your income tax will be determined by the commission or fees you charge for completed work if you are a contractor. For corporations, their taxable income is based on how much revenue they bring in, minus certain costs to do business.
This can apply to people your company pays on an hourly basis, salary, or contractor fee. You must report such information at the end of the year when filing taxes about who was paid during that time frame and how much they made. Many companies hire freelancers as contractors to avoid payroll tax reporting because it's more expensive than hiring people as employees (and having to pay for benefits such as health insurance).
When you see the price of a good, there may be a portion going to an excise tax imposed by your government for selling this specific type of item. This tax is often hidden as a percentage of product costs, which you probably don't know about because it's not an advertised amount that appears on sales receipts or invoices. These taxes are usually imposed on luxury goods and products that have been determined to have negative externalities, such as cigarettes and gasoline.
Capital gains tax
Capital gain is the profit made when selling an asset for more than its purchase price. To make sure everyone pays capital gains on their investments, most governments levy a percentage of capital gains realized in their country. The capital gains are taxed at varied rates depending on whether an investment has been held short-term (less than one year) or long-term (more than one year).
If your business becomes so successful that it starts to franchise off local operations under the company name, you might need to file for franchise tax if required in your region/state/province/prefecture. You will be required to pay a portion of your profits to the regional/state/province/prefecture that you are franchising in, just like any business is required to pay taxes on its net income.
If you sell your business as a stock or going concern, that means that there will be some transfer taxes that need to be paid for the privilege of transferring ownership. In some countries, such as those within the European Union, transfer taxes can vary according to country and type of asset being sold. For example, within the EU, they include stamp duty on shares, capital duty on real estate, and documentary credit on movable assets like share certificates and investment securities.