Sales Tax 101 for Small Business Owners and Entrepreneurs

If you’ve never run a retail or service business, you may wonder how sales tax works on the proprietor’s side of things. The tax money that businesses collect has no way of going straight to the government when a customer makes a purchase, and businesses are able to use the sales tax money they collect for their own needs in the short term. However, the government does require that a store, restaurant or other type of sales business, document and pay the sales taxes it collects on a regular basis. If the business owner fails to pay the taxes on time, the IRS has the right to seize the business in an attempt to collect the taxes owed. Separating Sales Tax from the Business’s Income during the course of everyday business, most business owners don’t separate out the money collected on the items or services they sell and the taxes they collect. Instead, most businesses use software that calculates and tracks sales tax collected versus actual income collected. Some very small businesses may skip the software and calculate taxes and revenue by hand, but this is a tedious task that can easily lead to errors as well as excessive paperwork.

Using Tax Funds for Operating Expenses

Because businesses pay taxes on a periodic basis rather than daily, business owners actually have that tax money available temporarily for their own use. It is up to you whether you want to set the money aside that your business has collected in sales taxes or if you prefer to use it as part of your operating capital and deal with the tax bill when it comes due.

Deciding How Frequently to Report and Pay

As a business entity, you may have the option to pay the IRS for the sales taxes you bring in on a monthly, quarterly or yearly basis, or the IRS may designate for you how frequently your business must pay. You also have the option to prepay your sales taxes, in which case you estimate how much you your business expects to collect in sales tax revenue. Knowing the ins and outs of your business’s finances may help you decide how frequently to pay. Restaurants and retail stores that do a lot of business during the holiday season may elect to pay yearly at the beginning of January because they know they’ll have the greatest amount of cash reserves at this time. New businesses without a lot of capital may elect to pay monthly so that they avoid receiving a bill they can’t afford.

Getting an Extension if You Can’t Pay on Time

In order to get an extension on paying your business’s sales tax when it is due, you must file and request an extension. If the IRS believes that you have good cause to request an extension, they will grant it, and you will have an additional month to pay, but you will have to pay interest on the amount owed during the time it remains unpaid. If the IRS denies your extension request, you must pay the taxes due immediately, and you may have penalties, fees and interest to pay as well.

Understanding the Penalties for Late Payment or Nonpayment of Sales Taxes

If you pay late or don’t pay at all, the IRS has the right to and most likely will charge you additional fees for not paying on time. Fees are typically a percentage of the amount owed. If you don’t pay at all, the IRS can take your business’s assets or seize your business’s bank account in an attempt to collect the debt your business owes the government.

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