Complaining about paying taxes is an American tradition. Taxes have an obvious downside for businesses by eating up profits. There's an upside though: taxes pay for police, roads and the schools that educate the workforce. Taxation has other effects too, some of them much more subtle.

Making Business Decisions

Companies make decisions with an eye to maximizing profits. That includes taking taxes into account. If there's a tax credit available for developing, say, a new antibiotic or opening a store in a particular district, some companies will choose that option over a path that doesn't lead to a credit. Tax laws shape big decisions, such as which country to base operations in, as well as smaller decisions such as whether to open a home office.

How People Get Paid

One of ways taxes influence business decisions is in how companies pay employees. Prior to the 2017 tax overhaul bill, companies couldn't write off more than $1 million in executive compensation to one individual unless it was performance-based. Under the bill, there's no deduction above that amount even if it is performance-based. The tax treatment of stock options can influence whether executives are better off receiving options or cash for their efforts.

Health insurance is a common employee benefit, and that's also influenced by tax policy. Employers can claim their share of employee premiums as a deductible business expense. Without that tax break, fewer employers might offer the benefit and more workers would have to hunt for affordable coverage.

Paperwork

Taxes don't just cut into business profits, they cut into time. Businesses typically have to draw up a lot more tax paperwork than an ordinary individual does:

  • W2s for employees.
  • A K-1 form for members of a partnership.
  • Schedule C for self-employment income. 
  • Schedule SE for Social Security and Medicare taxes on self-employment income.
  • 1099s for a variety of people including independent contractors and investors.
  • Receipts for travel, and for business meals.
  • Sales tax for any goods you sell.

Depending on your line of work, that can add up to a lot of paperwork. Even a small business may need to hire or contract with an accountant.

Money Coming In

Some businesses benefit directly from taxation, rather than from the indirect benefits of schools, roads and police. Companies who work for the government, such as defense contractors, get paid out of tax dollars. The medical industry benefits from Medicaid. Social Security payments give recipients money to spend on food, entertainment, clothes and rent, all of which benefits businesses. Those payments, as of 2018, are around 5 percent of the economy.