Start-up and small business owners often feel overwhelmed by tax laws. However, it’s important to understand the basics of how your business is taxed so you can make sure everything is done correctly. We’ve compiled this tax guide for small businesses that will help you get started with understanding your small business taxes.
Once you have a small business, you have the responsibility to make tax payments. There are taxes that are associated with small businesses. While income tax is one of the major taxes for small businesses, you may also have to pay additional taxes.
Why do you need to pay taxes as a business owner?
In Nigeria, all individuals employed, individuals in business, non-residents who derive income from Nigeria, and companies that operate in Nigeria are liable to pay tax. Remittance is determined by the tax; some are payable to the Federal Government (FIRS), others to state governments, and still others to local governments.
Types of taxes for small business in Nigeria
The first thing you should know is that there is no one-size-fits-all tax solution for small businesses. Every company is different and has unique needs when it comes to accounting for its finances, so a “one size fits all” approach isn’t always possible.
That being said, there are three basic types of taxes that most small businesses must pay: income taxes (including payroll taxes), sales taxes, and property taxes—and each type has its own set of rules governed by federal or state laws depending on where they operate within the country’s borders (or both).
In addition to income tax, businesses may have additional taxes to pay, which are usually influenced by the type of business being run. Also, how tax is paid is dependent on the type of business; if the business is a sole proprietorship, partnership, or incorporated company, it will influence how tax is paid. There are also independent contractors and virtual businesses.
Small businesses are expected to pay the following taxes:
- Income tax: It is an annual tax levied on the profits of registered companies; the profits must accrue in, be derived from, brought into, or received in Nigeria. Small businesses must pay taxes on the profit of their business. This tax is paid to the Federal Inland Revenue Service, and it is payable on a preceding-year basis. State governments receive income taxes from individuals and unincorporated businesses, while local governments are only allowed to collect levies and rates but not income tax.
The most common type of tax is Personal Income Tax (PIT) in the country. A Personal Income Tax is a tax imposed on individuals or entities (taxpayers) that varies with their respective income or profits (taxable income). Personal income tax is generally calculated as the product of a tax rate multiplied by taxable income. Small business owners pay taxes on their personal income tax returns. This tax is paid to the state government.
Company Income Tax (CIT) is payable only to the federal government and it is paid by both resident and non-resident companies incorporated in Nigeria.
2. Value Added Tax: It is also known as a sales tax. Business owners are required to collect Value Added Tax (VAT) on the goods or services supplied. It is mandated by the government for business owners to collect the VAT from consumers and then remit it to the relevant tax body. VAT returns are required to be filed monthly not later than 21st day following the month of transaction
There are two main methods of calculating VAT: the invoice-based method and the subtraction or accounts-based method. . The invoice-based method is the most widely used method as sales transactions are taxed, the customer is made aware of the VAT on the transaction, and businesses may receive a credit for VAT paid on input materials and services
3. Business Premises Tax: Business owners are charged a fee for the property used in the production of income, including rental houses, office buildings, factories, etc. Failure to pay might lead to the premises being locked up.
4. Withholding Tax: This is an advance payment of income tax. It is also an indirect source of taxation, deducted at source from the invoices of the taxpayer. Withholding tax rates are usually 10% or 5% depending on the type of transaction and the collecting authority for the tax (which can be the Federal Inland Revenue or the State Inland Revenue).
5. Employment Tax: As a business owner you are required to pay and file the taxes expected of the employees once you have one or more employees.
Use this tax guide for small businesses to manage your taxes effectively
Stay organized from the start
If you’re just starting out, it’s important to keep organized from the start. If your business is a sole proprietorship or partnership, for example, you’ll want to keep track of all your expenses and income in order to make sure that everything is being evenly allocated between those two legal structures. You’ll also want to keep tabs on your business’s financial health so that you know how well it’s doing financially and legally—and if there are any problems with either one of those things (e.g., an audit), then they can be identified early on!
Choose the right business entity for your small business
There are several different business entities that you can choose to form your small business. These include:
- Sole proprietorship – This is the most common type of business entity and it allows you to run your company alone. You don’t need any partners or employees, just yourself!
- Partnership – A partnership involves two or more people who agree to share profits and losses equally between them voluntarily in exchange for an agreed upon profit sharing arrangement (the “partnership”). Partnerships may be formed by individuals with no legal identity at all (such as two people living together) or by corporations with limited liability protection under state law.
Hire a professional accountant or bookkeeper
Hiring a professional accountant or bookkeeper is an important step for any business owner. By hiring an accountant, you can save time and money by eliminating the time spent on tax preparation, payroll processing, and other administrative tasks.
You should hire an accountant who is familiar with your industry—if your business operates in multiple industries or markets, this will help ensure that the information provided to you by the accountant reflects the actual financial status of your company. In addition, if there are any unusual transactions within those industries/markets (such as mergers or acquisitions), these will also be reflected accurately in their reports since they have experience working with similar companies in this manner.
A good bookkeeper will help provide insight into how best to improve profitability through better management practices such as budgeting; tracking expenses; analyzing sales trends; understanding customer demands; etc.
The most important things to remember are to plan ahead and keep organized.
- Plan ahead. You should have a plan in place before you begin your business, and it should be detailed enough that you can refer back to it when necessary.
- Keep organized and stay on top of things as they come up. This will help keep everything running smoothly while also ensuring that there are no surprises with filing deadlines or other important dates coming up soon!
Whether you’re a small business owner or an entrepreneur, we hope this tax guide for small businesses has helped you understand how to file your taxes in a simple, effective way. Remember that it doesn’t have to be complicated—just do your research and plan ahead!