Most small business entrepreneurs often find the filing of taxes challenging. However, it is a simple process, if you follow all required regulations carefully. There’s a lot of that goes into the scrutiny of tax forms. Therefore, it is crucial to know all of the fine details before filing your tax returns. Otherwise, you will make the whole process tedious and costly.
One of the most complex parts of running your business is understanding and fulfilling your tax responsibilities. Unlike your personal tax returns, which are usually completed with a few forms once a year, there is a lot more involved with preparing and filing your business taxes.
Especially if this is your first time filing small business taxes, you likely have a number of questions about how you go about it, which forms to fill out, and when. We are here to help.
In this guide, we will explain everything you need to know about small business taxes, including the types of taxes you may be responsible for, Not you will learn how to identify your tax responsibilities based on your business structure, and finally, but also when and how to pay and file your business tax return.
First and foremost, we shall explain the different types of small business taxes that you, as a business owner, may be responsible for. Generally, business taxes can be broken down into three levels, such as federal taxes, state taxes, and local taxes.
Your federal taxes, as you may already know, are those that you will need to pay to the IRS, which makes up the largest part of your tax burden. As for state and local taxes, these will vary from state to state and municipality to municipality, and therefore, your responsibility will depend wholly on where your business is located and what the tax laws are in that location.
Because these taxes will be unique to your business based on location, it is recommended that you consult your state and local tax agencies for more information on these business tax obligations.
Now, that being said, when it comes to federal taxes (and sometimes state and local taxes as well),
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(i) Income tax: Tax you pay on the income your business earns.
(ii) Self-employment tax: Tax you pay, as a self-employed business owner, to cover social security and Medicare taxes that are normally deducted from an employee’s paycheck.
(iii) Employment tax: Also known as payroll tax, this is a tax you deduct from employee paychecks (if you have employees) for federal income taxes, social security taxes, Medicare taxes, and federal unemployment taxes.
(iv) Excise tax: Excise tax is a tax you pay if your business is involved in certain goods or services, such as air transportation, fuel, or heavy trucks and tractors.
(v) Sales tax: Although there is no federal sales tax, 45 states have a sales tax requirement. If you are associated with selling goods and services, then you may be responsible for calculating, collecting and reporting sales tax.
(vi) Property tax: A tax you pay on any commercial property, land, or real estate that your business owns. Any business property tax will be regulated and applied on the local level based on where your business is located.
Following are the basics of paying your small business taxes:
When it really comes down to it, however, these four basics depend on your business’ legal structure. Your business entity type will dictate your tax burden. This is explained as follows:
A sole proprietorship is a business that’s owned and operated by one individual. Because the owner of a sole proprietorship is flying solo, filing taxes under this business structure is relatively simple. Rather than filling your small business taxes on behalf of the business, as a sole proprietor, you will report business income and losses on your personal income tax return.
And more importantly, your business profits will be taxed at your personal income small business tax rate. Furthermore, sole proprietors will be responsible for paying self-employment taxes, to cover the business owner’s Medicare and social security obligations.
If you run a sole proprietorship, you are generally required to file a Schedule C or a Schedule C-EZ with your Form 1040 and pay quarterly estimated taxes. Estimated tax is the method that all businesses use to pay social security and Medicare taxes along with income tax.
For example, if you were an employee, you would not worry about this. Your employer would withhold these taxes for you. However, as a sole proprietor, you are responsible for making quarterly payments with the estimated tax method.
In order to figure what you will need to pay in self-employment taxes and if you have to pay quarterly, then you will use Form 1040-ES, Estimated Tax for Individuals.
Business partnerships are operated and executed by two or more owners. Most partnerships are known as general partnerships, but there can also be limited partnerships or limited liability partnerships. Business owners who are a part of the partnership must pay income taxes, self-employment taxes, and quarterly estimated taxes. If you operate a partnership, the business has to file Form 1065, which is an annual information return that shows the income, deductions, gains, and losses from the business’s operations, but the business itself does not pay any income tax.
Partnerships enjoy what is called “pass-through taxation”, which means that the income is taxed on the owners of the business instead of being subject to corporate tax rates. And owners who are included in the partnership have to file their respective share of the business’ income and losses on their personal tax returns. Each partner’s share of the business’ income and losses are shown on a Schedule K-1.
If your small business is structured as a C-corporation where the tax is implemented separately from its owners, your business is legally separate from you as the owner. C-corporations are subject to what is called “double taxation”. Thus, to start, C-corporations are subject to a flat income tax rate of 21 percent.
Then, shareholders are taxed on their personal tax returns when profits are distributed as dividends. And the major income tax form for C-corporations is Form 1120. Shareholders who actively participate in the work of the corporation are known as employees. Only the employee’s salary is subject to self-employment taxes.
Dividends are subject to a different dividend-specific tax rate. Many corporations save on self-employment taxes by paying themselves a smaller salary and taking more money out of the company in distributions. However, the IRS requires you to pay yourself a reasonable salary given your job title, industry, and qualifications. There are several other tax advantages to C-corporations as well.
S-corporations are pass-through entities like sole proprietorships and partnerships. This means that each shareholder reports business income and losses on their personal tax return and profits are taxed at the personal income tax rate.
An S-corporation files an informational tax return, called Form 1120S, but the business itself does not pay a corporate tax. This allows an S-corporation to avoid double taxation. Similarly, C-corps, S-corps can also divide and distribute business income between a salary and dividends. C-corporations, in an S-corporation, salary is subject to self-employment taxes and dividends are not.
You can strategically try to save on self-employment taxes by paying yourself a lower salary, though, again, the IRS requires that it be reasonable for your qualifications. Both C- and S-corporations are liable to pay estimated taxes on a quarterly basis if they expect to owe $500 or more in business taxes for the year.
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A limited liability company (LLC) is a business entity that keeps the owners legally separate from the company’s debts or liabilities. As the owner of an LLC, you will have the liability protection of a corporation with the tax benefits of a sole proprietorship or partnership. If you operate an LLC, then you will be subject to pass-through taxation, just as you would be as a partnership.
In other words, with LLC taxes, you are not taxed twice like corporations are. Instead, as an owner of an LLC, you will make quarterly tax payments on your personal income tax forms. On top of that, you will also have to submit Form 1065 each year for informational purposes. In addition, LLCs provide you additional tax flexibility compared to other business entities.
So, from a legal standpoint, you can exist as an LLC. However, from a tax standpoint, you have the option to be taxed as an S-corporation or C-corporation.
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In addition to all these small business taxes, which you will be required to pay and file based on your entity type, you may also be subject to the other taxes, such as employment taxes, sales tax, and property tax. These taxes are based on the specifics of your business.
No matter what type of small business entity you are, you are required to pay quarterly estimated taxes if the business owes income taxes of $1,000 or more. Corporations, however, only have to pay quarterly estimated taxes if they expect to owe $500 or more in business taxes for the year. Prior to owning a business, filing taxes has occurred once-per-year occurrence. But as a small business owner, on the other hand, you will have to pay the IRS four times per year.
Although this means there are four deadlines to keep track of, it also means by the time your yearly tax deadline comes around, you will have already paid three-quarters of your tax return.
This being said, though, in order to make things even more complicated, businesses must deposit federal income tax withheld from employees, federal unemployment taxes and both the employer and employee social security and Medicare taxes. Depositing can be on a semi-weekly or monthly schedule.
To calculate the quarterly payment for your business taxes, you first need to estimate your expected adjusted gross income, taxable income, deductions, and small business tax credits for the year. The best way to gauge these numbers is to look at your taxes from the previous year as a guide.
And if this is your first year of filing a business tax return, make sure you consult your accountant or another tax advisor for assistance and help in making these estimates. Once you have put a number of these figures, you will just have to calculate how much you will owe in your estimated quarterly small business taxes. The easiest way to do this is to use the IRS Form 1040-ES Estimated Tax Worksheet.
Part of your business tax responsibility will be deposited to federal income tax that is withheld from employees, the employer and employee share of social security and Medicare taxes. Along with these deposits, there are tax forms you will need to file.
Businesses that withhold federal income tax or social security and Medicare taxes must file Form 941 each quarter. If your employment taxes will be less than $1,000 for a calendar year, you can alternatively file Form 944 on an annual basis. Employers must also file Form 940 annually if they have employees to report their federal unemployment tax obligations.
The amount of unemployment tax you will be responsible will depend on the wages you pay to your employees. You must file Form 940 if you pay at least $1,500 in wages in a quarter. And your deposit schedule depends on the total tax liability you report during a four-quarter look-back period. If you reported $50,000 or less in business taxes during the look-back period, you’ll follow a monthly deposit schedule.
On the other hand, if you reported more than $50,000, you will follow a semi-weekly deposit schedule. Under the monthly deposit schedule, you must deposit employment taxes for each month by the 15th day of the following month.
Under the semi-weekly deposit schedule, you must deposit employment taxes for payments made on Wednesday, Thursday, and Friday by the following Wednesday. For payments made on Saturday, Sunday, Monday and Tuesday, you will need to deposit your taxes by the following Friday. You can make these small business tax deposits using the Electronic Federal Tax Payment System (EFTPS).
In order to stay on top of your small business taxes, you will need to carefully prepare in advance of any filing deadlines. The process of filing your business taxes is much easier if you take time to prepare all your small business’ financial documents and records before tax season rolls around. The reason is simple: If you are scrambling to get everything together a few days before a business tax deadline, you are setting yourself up for disaster.
When you sit down to file your small business taxes, you will want to make sure you have these financial documents on hand. Additionally, because you will have to make a thorough accounting of all income and expenses associated with your small business, it will help if you have saved these documents, too:
If you keep hold of all these receipts and documents, you will have a much more accurate income and expense statement when it comes time to file your small business tax returns. Most of these income and expense categories should be easy to locate on your business accounting software or get from your accountant.
Another reason to keep all those documents of your business’ expenses together is that you can deduct your expenses to save money on your small business taxes. This means possibly saving hundreds or thousands of dollars for your business each year. Depending on how your business is legally structured, you are allowed to deduct “ordinary and necessary” expenses that your business incurs by just operating.
If you can prove that the deduction is relevant, you can deduct it from your taxable income. Essentially, deducting your expenses means that you are lowering your income and therefore, lowering the amount you owe in business taxes.
In addition to deductions, you may be able to claim credits, which are even better than deductions because they directly cut your tax bill by the amount of the credit.
With this in mind, however, the list of small business tax deductions and credits is quite long. Not all deductions and credits will be relevant to your business, but it is nevertheless worth familiarising yourself with all of them, so you can save as much money as possible on your small business taxes.
There are some tax deductions that no small business owner should miss when filing their business tax returns.
These are the deductions that apply to almost all small businesses, and therefore, if you do not take advantage of them, you are overpaying your taxes each year.
Many small and micro business owners are using a car, van, or truck for their company. If you can prove that you use the vehicle for business purposes, then you can deduct the cost of operating the vehicle.
There are two ways to deduct your vehicle expenses on your small business taxes: standard mileage rate and actual car expenses. With the standard mileage rate method, you will deduct the cost of operating your vehicle based on the amount you drive it, say, about $0.58 per mile in 2019. If you go the actual car expenses route, on the other hand, you will deduct the cost of your vehicle by reviewing all the costs you incur from operating it: gas, oil, repairs, auto insurance and so on.
Whichever deduction method you choose to use, you will want to make sure it is the one that saves you the most money on your small business taxes.
Many small business owners can protect and guard their company and business with at least one form of business insurance. If you pay for your business owner’s policy, health insurance, malpractice insurance, etc., you can deduct 100% of those premiums on your business taxes.
If you rent the space you do business in, you can deduct your rent payments on your small business taxes. Plus, this does not only apply to office spaces or store-fronts, but you can also deduct your rent payments for the equipment and machinery you use. If it is just you or a few others running your business, you might operate out of your home. If you rent your home and use it as part of your business space, you can deduct the rent you pay for that portion of your house, too.
A home office deduction is one tax deduction that your small business definitely should not miss. Those rent payments can be pricey, and you can save a lot on your business taxes if you take the time to deduct them.
In the long list of small business tax deductions, you might stumble across some that you did not even know existed.
Here are a few that you might have overlooked, but should absolutely take advantage of when filing your small business taxes.
If you are just opening the doors of your small business, you know how expensive starting up can be. There are lots of start-up costs you will need to cover to get going. Fortunately, you can actually deduct all of these related costs on your business tax returns. Any business start-up and organizational costs are capital expenditures by the IRS. Start-up and organizational costs are pretty broadly defined by the IRS. They are essentially any amounts paid or incurred when you start a business. They could even be the costs of researching the business before you start.
As long as your start-up costs do not exceed $50,000, you can choose to deduct up to $5,000 of business start-up costs and up to $5,000 of organizational costs. If your start-up costs are higher than $50,000, the deduction will be happening by that amount and you cannot deduct any start-up costs if your total costs amounted to $55,000 or more.
After the initial deduction, the remainder of your business start-up costs can be amortized and deducted over a period of 180 months.
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In most cases, inventory is not quite a tax-deductible expense. Maybe that is why you have overlooked them on your small business taxes. But, if your business uses the cash method of accounting and chooses to treat inventory items as materials and supplies, you can deduct those expenses on your taxes.
Additionally, if you are in a service-based industry, you can probably deduct the cost of your inventory. For instance, if you operate a beauty salon that offers hair cuts and sells shampoo and conditioner, you are probably eligible for a tax deduction.
If you have a small business loan, a business credit card, or a mortgage, you will make interest payments on what you are borrowing from the lender. This might come as a surprise, but those interest payments are deductible on your small business taxes. No one likes paying interest on what they borrow, but those payments are a little easier to swallow if you know you can deduct them on your taxes.
The six small business tax deductions mentioned above are just a few examples of all the different deductions you can take advantage of on your small business taxes. There are also plenty of small business tax credits, particularly for businesses in the science and technology industries.
Therefore, you will want to research your tax deductions thoroughly and take the time to weed through the ones that you can take advantage of and the ones that you can’t. If you interpret the tax code wrong and take deductions that you should not, however, you might be opening the door for a business audit.
Depending on the IRS business forms you are filing, you generally have two options for actually filing your small business taxes, which are electronically or by mail. Typically, it is much easier to file online, either by using an appropriate tax or accounting software or through the IRS e-file system. In fact, not only does the IRS recommend that you file your business taxes electronically, but they also require it in certain cases.
If, on the other hand, you do ultimately decide to file your business tax returns by mail, you will want to be sure you follow the IRS instructions based on the form you are filing and that you mail your return to the correct address. This will decrease the likelihood that the IRS has problems receiving or processing your returns.
With some time, effort and patience, any small business owner can navigate the process of filing business taxes on their own. But as a small business owner, you are juggling a lot of things at once, and you might not want to sacrifice any of your time managing your business to also serve as your business’ accountant. Therefore, if you do not have the time to do your small business taxes right (or even if you just want some help), you should absolutely consider hiring an accountant to help you out.
Here are some tips for searching for an accountant
You can find business accountants online, but also you can explore other routes before turning to Google. If you hire a professional business accountant, they can do more for you than just file your small business taxes. The right business accountant can be a trusted financial advisor throughout the life of your business.
So, instead of just going with the first business accountant you find online, you should start with referrals. You can ask a business advisor, lawyer, or banker for recommendations, or tap into a small business association to find a trusted business accountant.
You can also get referrals by attending small business events by your local Chamber of Commerce or Small Business Development Center.
Some business accountants have gone through a qualification process to become a Certified Public Accountant (CPA). If you work with a CPA, you can be sure that your accountant has been pre-screened and is well-trained and experienced. These professionals have to take a test to qualify and periodically renew their certification. So, you can be confident that they will be up-to-date with all accounting methods and best practices.
To find a CPA, you can visit the American Institute of Certified Public Accountants (AICPA). You can take advantage of the AICPA’s director of CPAs, accounting companies and local accounting organizations to find a great accountant for your business.
As mentioned earlier, in the best cases, a business accountant does more than just file your small business taxes. They will have an understanding of how your business operates and manages its money, so a great business accountant can give valuable advice and guidance for managing your business’ financials. Therefore, when you have found a few ideal accountants to consider, you will want to take the time to figure out which one will be the best match for your business.
When you are interviewing a candidate, here are a few questions you can ask:
Although not a comprehensive list of questions, you can ask these first to get a sense of whether the accountant will be a good match for your business.
Maybe you have a little accounting experience under your belt or you just cannot justify paying someone to do your small business taxes for you. If you choose to tackle your business taxes on your own, you will want to consider using accounting software to make the process much easier. In fact, even if you do hire a business accountant, you will nevertheless want to use accounting software to help you manage and streamline your financial processes.
For example, QuickBooks is a simple, powerful accounting software used by millions of small businesses. QuickBooks can help you with your small business tax accounting, but it can also help you with payroll, inventory management, profit, and loss analysis and more. Plus, QuickBooks has many different editions that can meet any level of accounting need, you will just have to pay for varying levels of service.
If you choose to file your own small business taxes, you do not have to go it totally alone. There are many apps that you can use to stay organized, prepare your financials and make tax season a breeze.
(a) Your business taxes might only be on your mind a few weeks leading up to deadlines, but preparing and organizing them should really be a priority all the time. If you take steps to prepare before tax season, you will save yourself a lot of headaches when you actually need to file your business tax returns. To this point, you will want to make sure that all of your records are current and accurate and that you keep everything you might need in the future.
(b) Although small business taxes are quite time-consuming, you will want to pay close attention to deadlines. If you do not pay your taxes on time, you will be charged fees that only get worse and worse as you get further away from the original deadline date. Therefore, the best time to start preparing your small business taxes is now, but as a good rule of thumb, you should start working on them at least two weeks before the deadline.
(c) Last, but not least, do not be afraid to ask for help with your small business taxes. If you do not have time to do your business taxes properly, hiring a business accountant to step in is well worth the cost. Not only can an accountant answer questions and help you file your business taxes, but they can also give you the best tips on how to maximize your tax return.