Discuss how taxes affect small businesses.

Question

What will be an ideal response?

Answer 1

Taxes affect almost every aspect of operating a small business. First, there is the direct taxation of business income as an income tax on corporate profits. Second, employers must withhold-and often match-a variety of employment-related taxes levied on their employees, such as federal and state taxes on personal wage and salary incomes, and federal taxes levied to fund the Social Security and Medicare systems. Third, owners must pay personal taxes on their salaries and other ownership-related income they withdraw from the business. If part of their wealth is invested outside the business, they face taxes on the investment income they receive. Fourth, taxes are levied on the transfer of ownership of the business. Therefore, the owner must do careful estate planning to minimize the tax bite on an inheritance. Fifth, taxes also affect business decisions on other levels as well. For example, the choice of the best form of business entity largely depends on the profitability of the business and the tax status of the owner(s).
It is the responsibility of the business owner to collect several taxes for the government by withholding sums from employees' paychecks or by adding the tax (such as sales or use taxes) to the price of products sold to customers. These administrative costs become very expensive in terms of personnel, time, and money.