With Miami recently named the top city to start a small business, now is a great time to get a startup off the ground in Florida. Most small businesses start out as sole proprietorships. Compared to many other business entities, sole proprietorships are simple to set up and run. Florida small business tax rules are also favorable for business owners and state laws are generally supportive of small business startups.
But Individual advice from a Florida small business accountant is better than any information online, as your accountant will advise you according to your situation. Still, there’s nothing wrong with learning more about your small business tax liability in Florida.
Does Florida Have a Strong Economy?
Before looking into small business taxes, it’s good to consider the Florida’s economy. One of the benefits of starting a small business in Florida is the economic growth in the state. Of all US states, Florida has one of the fastest growing economies. According to statistics from 2018, if Florida were its own country, it would boast the 17th largest economy in the world based on GDP growth.
Some of the biggest industries in the sunshine state are as follow:
- International trade
- Life sciences
- Financial services
While business in many other industries can thrive in Florida, the above represent the industries that employ the most people, generate the most revenue and make up the biggest part of the economy.
The labor force in Florida is expanding by more than 3% annually, while the rest of the US sees little to no growth in the same area.
Florida’s economy is growing at a fast pace. It helps that state laws in Florida encourage rather than dissuade people from starting businesses. When combining all of the benefits of starting a small business in Florida, including taxes and the economic outlook, the state is ranked as the 20th best state to start a small business overall. While that listing might seem mediocre, another survey listed Florida as the sixth best state to start a small business based on startup success.
How are Small Businesses in Florida Taxed?
Most small businesses are sole proprietorships. A sole proprietorship is a company owned by a single person. The owner of a sole proprietorship will usually have full say over what happens in the business, even if a small business employs a manager to make certain decisions, the owner will retain the ultimate authority in his or her business as the only owner.
Sole proprietorships are taxed on profit. This means that business owners will need to implement proper bookkeeping strategies to calculate their tax liability. Small business profits can be calculated monthly by adding up all income. Once a business owner know their total income, all business expenses must also be tallied. Subtracting all the expenses from the total income produces the profit.
While this system seems simple enough, both state and federal tax laws are always changing. Not all business expenses qualify for full deductions – meaning business owners can only subtract part of the costs of certain expenses.
To make matters more complicated, most small businesses in Florida will pay taxes in advance on a quarterly basis. What this means, is that businesses actually pay tax based on what they expect to earn in the future, not what they’ve already earned in the past. If a business underestimates its quarterly earnings and pays too little tax, outstanding taxes will need to be paid later, often with additional tax in the form of late payment fees.
Florida Self-employment Tax Rate
Self-employment tax acts as a replacement for Social Security and Medicare tax. As self-employed business owners don’t have these employment benefits, a self-employment tax compensates.
Florida’s self-employment tax rate is 15.3% for the first $128,400 net income of small businesses. Additional business tax rules apply across different income brackets, however.
Statistically speaking, Florida ranks fourth as one of the states with the lowest self-employment tax rates.
Should You Pay Tax on Your Side Business?
Paying self-employment tax when your business in your sole source of income is expected, but what about if you’re employed with a business on the side?
Unfortunately you’ll still need to pay self-employment tax. If your business makes more than $400 annually, you’ll be liable to pay self-employment tax, regardless of whether or not you hold a full-time (or part time) job.
Florida Sales Tax Rate
Sales tax is a tax levy on all product or services your business sells. As a result, almost all small businesses will qualify for some form of sales tax. One average, Florida sales tax is currently charged at 6%.
What this means, is that you will have to account for 6% sales tax on all the products or services you sell. If you need to sell something for $100 to make your desired profit, you’ll charge a customer for $106 to account for the money you’ll need to pay in sales taxes.
Forgetting to account for sales tax is a mistake many business owners make. Always calculate how much profit your business needs to make to be sustainable, then set your rates. Once you know what you desired rate is, add a 6% sales tax on top of this amount and put the money you get towards you sales tax aside. Never spend your sales tax money. Make sure you have enough left to pay all your taxes!
To calculate how much you need to add onto the cost of your product or service to account for sales tax, use your calculator to multiply your price by 0.06%. Once you have this result, add it to your price – this is the amount you’ll need to charge customers.
For example, if you have a product you want to sell for $50, your calculations will look as follows:
$50 x 0.06 = $3
The $3 is what you need to add onto your $50 to account for your small business taxes, so you’ll be charging your customer $53 for the product you sell.
In the past few years, Florida has consistently ranked 22nd for sale tax rates – meaning the sunshine state is relatively average as far as sales tax is concerned.
Florida Small Business Tax Summarized
Florida ranks 4th as one of the states with the lowest small business tax rates. This makes Florida a great state to start a small business. Tax laws in Florida do differ based on what type of business entity you own though.
While most small businesses operate as sole proprietorships, there are other business tax models in Florida. Florida taxes corporations at an approximate tax rate of 5.5%. However, there are many variables with regards to how much taxes a business entity will end up paying.
The best way to know for sure how much tax your business should pay, it’s best to hire an accountant to analyze your books. A Florida accountant will know what tax deductions, credits and exemptions your business qualifies for.
When consulting an accountant about your business’ tax liability, it’s imperative to have thorough financial records of your business on hand. If you don’t have any financial records yet, your first step should be hiring a reliable bookkeeper for your business. Once tax season comes around, your accountant will calculate your tax liability based on your financial books.