It’s crucial for small business owners to know how much money they should set aside for taxes. The amount you must set aside will vary depending on your business structure, income, and expenses. Small firms should often set aside 25–30% of their income for taxes. Nevertheless, this may change based on the particulars of your case.
Your company’s organizational structure is a crucial consideration. Your business income is taxed at your personal tax rate whether you operate as a sole proprietor or a single-member LLC. You must therefore set aside sufficient funds to pay both your personal and corporate taxes. The income from your business is taxed separately from your personal income if you have a partnership or a multi-member LLC, though. In this scenario, you only need to budget for your company’s taxes.
Your income and expenditures should also be taken into account. You might need to set away a bigger portion of your revenue for taxes if your business generates a high income but little expenses. On the other hand, you might be able to set aside a smaller amount if your company has a low income and high spending structure.
It’s also crucial to keep in mind that state-by-state tax rates can differ. For instance, Massachusetts is known for having high taxes. Massachusetts has the sixth-highest combined state and local tax burden in the nation, according to the Tax Foundation. The state’s high income tax rate of 5.05% is partly to blame for this. Massachusetts also imposes a number of other levies and charges, such as a 6.25% sales tax and an 8% corporate tax rate.
Finally, it is important to remember that there is a standard deduction for Massachusetts state taxes, which for tax year 2020 is $12,400 for single taxpayers and $24,800 for married couples filing jointly. This implies that you might not have to pay any state income tax if your taxable income is less than the standard deduction.
Finally, it should be noted that while small businesses should try to set aside 25–30% of their income for taxes, the actual amount may differ based on the nature of the firm, income, and expenses. Due in part to its high income tax rate, Massachusetts has a significant tax burden. If your income is below a specific level, there is a standard deduction for state taxes that could lower your tax obligation. As usual, it’s crucial to seek advice from a tax expert to make sure you’re saving enough money for taxes.