Operating a small business means you will have to juggle between different types of taxes based on the products or services you sell. One such "not so discussed" tax is Gross Receipts Tax (GRT).
While this can sound new to you, not all states impose GRT on business owners and you would be happy to know that it's quite easy to understand it.
Whether you're just starting out or have been in business for years, understanding your tax obligations is crucial to avoiding penalties and ensuring your business stays on track. So, let's dive in and learn more about GRT!
What is Gross Receipts Tax?
Gross Receipts Tax (GRT) is a type of tax that is based on the total revenue or receipts generated by a business. In the UK, GRT is known as the turnover tax or the transaction tax, and it applies to businesses that have a certain level of annual income. The tax is calculated as a percentage of a business's gross receipts and is frequently paid to the government - such as once a quarter or a year.
Unlike other taxes that are based on profits or income, GRT is assessed on a business's total receipts, regardless of whether the company is profitable or not. This means that even if a business is not making a profit, it still needs to pay GRT on its gross receipts. Additionally, GRT is usually assessed in addition to other taxes that a business may be required to pay, such as corporation tax or VAT.
GRT is intended to be a simpler and more transparent way of taxing businesses, as it is based on a company's gross receipts and does not require complex calculations of deductions or allowances. However, it can be a considerable expense for some organisations, particularly those with high revenue but low-profit margins.
Difference Between Sales Tax and GRT?
There are lots of questions about how sales tax is different from GRT.
While sales tax and gross receipts tax have common calculations based on the total amount of sales, they are inherently different. Sales tax is calculated on the final sale of goods and services to consumers. While making the purchase, the seller collects an additional amount to the price of the item or service. This amount is not an expense of a business owner as the amount owed to the taxing authority is no more than what the customer has paid.
On the other hand, GRT is based on gross revenue (total) generated by a business. Now this is something that the business is liable to pay to the taxing authority.
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How does Gross Receipts Tax differ from other business taxes?
At this point, you know what GRT is, but how is it different from other taxes? Well, GRT is slightly different from the taxes that you might be familiar with. Unlike other taxes that are based on the profits you make in a business, GRT is something that is based solely on your company's profits or income.
Another thing that makes it different is that it has a flat percentage of a company's gross receipts. This way, the process gets simpler and more transparent than other taxes - which generally demand complex calculations, deductions or allowances.
That being said, you will be often paying the GRT as an addition to other taxes that a business may be required to pay - like corporation taxes or VAT.
Overall, GRT is just one of the many taxes that businesses in the UK need to consider. While it has some unique features that distinguish it from other taxes, it's still an important expense to factor into a company's financial planning.
What kind of businesses pay GRT?
Your GRT payments differ as per the state you are in and the level of income you have shown. In general, GRT will be levied on businesses that show a certain amount of revenue or have a certain level of economic activity in a state. Regardless of the size of your business, you will be paying GRT based on your gross receipts.
The Gross Receipts Tax rate varies throughout the states from 5% to 9%. This happens because the total rate combines rates imposed by the state, counties and if applicable, municipalities where businesses conduct their operations.
Usually, businesses can experience a slight change in the rates in January and July. As a business, you will be using the location code and tax rate corresponding to the location where goods or products are delivered.
It could also be possible that in some states the GRT is applicable for businesses that earn a specific amount and in other states, it's based on the type of industry you are working in.
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How is Gross Receipts Tax calculated?
Now, let's get down to numbers! You would be happy to know that while it may sound intimidating, Gross Receipts are quite easy to calculate.
Before you begin calculating the gross receipt taxes, do collect the following information that you will need in order to complete the tax calculation process
- Total gross receipts from the previous accounting year
- Estimated total gross receipts for the current year
- Total gross receipt tax paid the previous year
As we mentioned earlier, it is a flat percentage of whatever your company's gross receipts will be. Your gross receipts are the total amount of revenue or income that your business is generating.
This percentage can fluctuate based on numerous factors like - there might be some specific rules and regulations that may apply to your business. This can influence the pay rate and you may need to pay more or less based on this situation.
You must figure out your company's gross receipts for a given time period - this can be numbers from your quarters or year. Once you have the sum, you can calculate how much tax you need to pay by multiplying it by the applicable GRT rate.
Although the basic GRT calculation is very straightforward, it is crucial to maintain regular records of your company's gross receipts to make sure you are paying accurate amounts towards your tax liability. Proper records not only help in calculating GRT but also can be handy in predicting all other types of taxes and getting possible deductions or allowances that could lower your tax bill.
State-Specific Gross Receipts Tax
It's important to keep in mind that GRT is not utilised by all states. While some may use it as a prominent tax, others may not use it all.
For example - In New Mexico, businesses are required to pay GRT on their gross revenues. It is a significant source of revenue for the state government.
On the other hand, other states might not use GRT at all or might have various corporation tax regulations. For example, rather than focusing its corporate income tax on a company's total sales, other states may base it on its profits or net income.
If you plan to operate a business in a state where GRT is required, it's best to stay ahead of all the tax regulations and prepare yourself well in advance for all these aspects. In general, it's also suggested to talk to experts and understand any specific rules or regulations that your company needs to keep a check of. This may include signing up with local tax authorities, maintaining detailed records of your gross receipts and submitting regular tax returns to report and pay GRT.
There are only nine states in the USA that are required to pay GRT.
- Delaware
- Nevada
- Ohio
- Oregon
- Tennessee
- Texas
- Washington
and several more like Pennsylvania, Virginia, and West Virginia, allow local taxes to be levied using a gross receipts base. In 2020, South Carolina changed its municipal gross receipts tax to a tax on net income (profits).
Now, this list may change at any time as more and more states have been considering including GRT in the upcoming years.
The rules and regulations of GRT also may differ based on their location. For example, you may be paying more GRT in some states than others. It completely depends on the government and authorities to decide on these rates. Till now, the UK has not incorporated the GRT into their system and so you will not be paying the GRT if you are running your operations in the UK.
How Gross Receipts Tax Affects Your Business
GRT can have a great impact on your company by raising your tax obligations. If you are running a big company with significant revenue, then GRT can become a major expense for you as it is based on total gross receipts rather than net income or profits. This can reduce your income and slightly affect your chances of expanding your business.
Additionally, businesses under the GRT-imposed states may be at a disadvantage versus those in states where it is not imposed. Here's why - businesses with GRT may have higher operating costs, which can impact pricing and competitiveness.
However, it's worth noting that there are some potential benefits to GRT as well! For example, because GRT is based on gross receipts rather than net income, it can be a more stable source of revenue for state and local governments. This can ensure that your company has access to dependable infrastructure and public services- which of course can be a great benefit for your business in the long run!
Additionally, GRT is also relatively simple to administer and calculate. As a new business owner with limited resources, you won't necessarily need an accountant or professional body to be associated with you. You can easily manage your own taxes.
Another thing that makes GRT a favourable tax is that it's less volatile than other taxes. Profits or sales can be really unpredictable, especially when you are new in the business. In such a case, paying your taxes on gross receipts can save you from another worry of budgeting and planning everything - just to end up with some unpredicted tax bills.
Ultimately, the impact of GRT on your business will depend on a variety of factors, including your industry, your location, and your revenue levels. A competent tax expert can guide you through the complexities of GRT and other business taxes.
How can I prepare for and manage Gross Receipts Tax payments?
If you run a business somewhere where it imposes Gross Receipts Tax, you should be prepared and organised to meet your tax requirements.
To begin, it's crucial to understand the precise rules and regulations that apply to GRT in your area.
This may include requirements around tax filing deadlines, record-keeping, and payment methods. You may also need to register your business with the relevant tax authority and obtain any necessary licences or permits.
Once you have a clear understanding of the GRT requirements in your region, you can start to prepare for tax payments. This may involve setting aside funds to cover your tax liability and implementing systems to track your gross receipts and ensure accurate reporting.
One of the most important steps in managing GRT payments is to stay organised and keep detailed records of your transactions. This can help to ensure that you are accurately reporting your gross receipts and avoiding costly mistakes or penalties.
If you are operating your business in a region where you are supposed to pay GRT, then here's what you need to do:
- First and foremost, it's good to understand the precise GRT guidelines that apply to your area. This contains rules about tax filing dates, document retention, and payment procedures. Additionally, you might need to register your company with the appropriate tax body and acquire the required permits or licences.
- Next, you can begin with your preparations. This involves getting ready for tax payments once by putting aside your tax money and implementing systems to track your gross receipts. You also need to ensure that you are accurately reporting them!
- One of the most important steps is to stay organised and keep detailed records of everyday transactions. Once you get the hang of gross receipts, ensure that you are reporting your gross receipts on a daily basis.
How to file your gross receipts?
1) Identify your gross receipts: Since you will be keeping a record of all your transactions, you will be able to identify your gross receipts by going back to your sales, rental income and interest incomes.
2) Fill out appropriate forms: Every state has its own filing deadlines and tax forms. Check with your state's tax agency to understand the forms that you are supposed to file.
3) Calculate due tax: Next, you may want to determine the amount due on your taxes. Use the appropriate tax rate as set by your state to prevent underpaying or overpaying the tax obligations.
Once you have finished working on your GRT form, submit your return and payment to the relevant state agency by the filing deadline.
What are some common mistakes to avoid when paying Gross Receipts Tax?
Despite GRT being one of the easiest taxes to file, it could come with some possible errors that can result in penalties or fines. A smart way to deal with such situations is to know about these common mistakes made by businesses.
One of the common mistakes is ignorance. As a business owner, you often have a lot to do - but amidst this, you can't afford to miss tax deadlines! If you are unable to keep a track of tax deadlines, make sure you are hiring a professional who will take care of it for you. You might need to submit regular tax returns and make payments quarterly or annually - depending on the laws in your area. If you are unable to meet the deadlines, you will be fined a significant portion of your revenue. This amount can also mount up over time!
Additionally, some companies might mistakenly think that they are exempted from GRT, when in fact they are not! So, make sure to research deeply before you assume anything.
Finally, don't make the mistake of understating your gross receipts or engaging in actions of tax evasion. This is against the law and may result in harsh penalties and even legal action.
Whether you are a small business owner or an established entrepreneur, it's a smart idea to keep up with the tax obligations to nurture your business. We hope this guide was helpful for you to understand all about Gross Receipts Taxes and how to keep up with them. Want to know more about staying at the top of business finances? Explore wamo and unlock everything that you need to grow your business in a foreign country!
